John: It’s April 2nd, 2013. We’re on Sand Hill Road in Palo Alto.
Mike: Menlo Park.
John: In Menlo Park. We’re in Silicon Valley with Mike Moritz of Sequoia Capital. Mike, we really do think you represent a sui generis character here because not only did you work as a journalist, and you covered Silicon Valley and venture capital, but then you managed to invest in a number of technology companies that have played major roles in this whole journey of journalism and technology. Could we start out with just a five minute exegesis from you on when you first began to figure this out and how you came to this? I’ll just let you tell that part of the story.
Mike: Like everything that we do, there’s only a grand design in retrospect. At the time that particular investments present themselves, it’s not as if there is, despite what all the myth makers and marketing departments might say many years afterwards, a huge, enormous, grand design right at the outset. When we invest in a small company of a few people, what we’re really thinking about is how we survive the next year. Rather than where things might be 10 or 15 years from now. That’s certainly been true of the investments that we’ve made on the Internet. As the years went by, we became more educated about the possibilities and instincts became, perhaps, a bit more refined.
But at the beginning, we were really feeling our way. I suspect, in the mid 1990s, when Sequoia Capital first encountered the founders of Yahoo, which was really our first Internet investment of note in a software company.
Bear in mind, some years before that, Sequoia had been the only investor in Cisco Systems, which helped lay the underpinnings for much of what was then possible for all the software and media companies. But when we encountered Yahoo, the only real differentiated insight that we may have had at Sequoia was the fact that we had a lot of belief in the notion that, if a substantial audience is built for a site on the Internet…
This is before they were called destinations or properties. Then with time, it should be possible to attract advertisers. The idea that was heretical in 1995 in these environments was the idea that you could provide a service for free.
People in the investment world, in the venture world and elsewhere got all tangled up in the conundrum o f whether or not it was possible to have a business that on the surface gave itself away for free to consumers.
Our assumption all the way along was that Internet sites were no freer for consumers than network television or broadcast radio, which in retrospect, seems straightforward, very evident, extremely apparent. But for whatever reason, it perplexed a lot of people. Don’t forget, there was no history in Silicon Valley perhaps outside of AOL, which was not really considered a Silicon Valley company because its center of gravity was in the east.
There hadn’t been any investments from our sector in these sorts of companies. The only investments in “media companies” that people could conjure up were in long since obscure and failed magazines.
Then, Sequoia in the very early years, had invested in a little magazine that went nowhere.
John: What was it?
Mike: I think it was before I arrived here, something called “Executive Magazine” or something like that.
Martin: Can I ask you about…Because I recall this notion of free intersected with the New York Times in the mid 90s. I think part of the issue was that these industries collided in roughly 1995 in a way that they hadn’t before. One of the things that kind of comes up as a theme in some of our interviews is that Yahoo managed to get access to Reuters and the AP pretty early. We packaged content that had been coming to the consumer indirectly through broadcast and print channels and brought it directly to the user in an almost a kind of very updated way and so created in a sense, a superior free service to the legacy service that thought they should be paid for.
Yahoo News, in a sense, set the stage. It became large very quickly because of the size of the portal. It set the stage very quickly for the rest of journalism to go free.
Can you comment on that? Do you disagree with that or is that something that…?
Mike: I wasn’t talking about Yahoo going free in as narrow a sense as you were just alluding to. I was just talking about the whole idea of the website and all the different things over time that it offered. Best as I recall, at the beginning, there wasn’t a purposeful desire to get into the news business. I think it was very much the result of the fact that Reuters at that point had a corporate venture on that was quite active, run by a thoughtful person.
They had identified Yahoo and I think also Excite, had made small investments in both. We had said to them, “As a result of the investment, there’s got to be something more than money. We need some sort of relationship. Can we perhaps distribute the news and information that you provide on the Reuters’ wire?”
That was what led to the beginning of the news business. The news business, in and of itself on the Internet has not been a great business. It’s been a very useful service for consumers but there are many other ways and far more profitable ways for companies like Yahoo and Google and others to build large sales volume than trying to sell advertisements around news and information.
It does not, to use the dreadful word, monetize as well as so many other portions of their business.
Martin: Yet, you’ve continued to invest in news and information. I think you were an early investor in the Bleacher Report, right?
Mike: No, we weren’t.
Martin: You were not. In Sugar, maybe?
Mike: In Sugar? I think after Yahoo we’d also invested in a financial services company called Quid.com that eventually I think was bought by Lycos, but they had the idea… Let me just finish with…There’s a fair amount. If you’re interested, we can say more about Yahoo.
Martin: Yeah, let’s do that please.
Mike: I think to some extent, it was a little accidental that we got into the news business. When Jerry and David were first talking about the site, news certainly, current news was never on the road map. It became about like so many things on the Internet, accidental and opportunistic.
John: Is it fair to say that for the most part, your media investments have been at least the most successful ones platforms, not content, right? Yahoo, Google.
Mike: YouTube. YouTube, I think of is one of Sequoia Capital’s really wonderful media investments. I think, John, these companies at the beginning, they’re not platforms. They’re very narrow, niche companies. I think any company that sets off to become a platform at the beginning will get eviscerated along the way.
I think what happens is these little Silicon Valley companies, they start with an offering that for whatever reason, becomes popular and then the opportunity widens out and they then become recognized as a distribution platform.
John: Twitter could’ve been just a notional thing but it became a platform.
Mike: It’s become a form of distribution of other people’s content as well as in some cases and in other companies therein.
John: Is there anything you can say as somebody who evaluates thousands of these things over decades? Is there anything that you can tell us that you see in one that is destined to go on to something versus ones that you pass on or ones that ultimately fail? What is the secret sauce?
Mike: At the beginning, it’s very difficult. Every time we feel that there’s certain successes attendant to any particular business, when we make the original investment decision, I think we’re deluding ourselves. Because if we’ve done our work properly, the decision rests on a narrow knife edge because there are so many reasons why the company might disappear. Again, 15 years after the original investment when everything is obvious through the rear view mirror.
That doesn’t seem like the case, but if you place yourself in 1995, there were two people who dropped out of the PhD program at Stanford. They’re surrounded by all of these other companies that are really powerful.
AOL, for example, all the networks, the broadcasting companies, other companies out here like Netscape, not to mention Microsoft and the browser wars. The people at AOL and Netscape and to a lesser extent Microsoft saying, “Goodness gracious. We’re going to eradicate this little company from the face of the Earth.” People forget that 15 years later.
Nothing about these things is certain, but at Yahoo they led with alacrity onto a lot of these things.
John: Yahoo becomes a tremendous disruptor of fundamental models of journalism and news and in many ways, improves what consumers can get and when they can get it and changes the [inaudible 14:55] .
Mike: I never thought of it all that differently. This will sound weird, from Time magazine circa the 1920s. When Time magazine…People forget this now.
John: Your alma mater.
Mike: My alma mater for three or four years.
John: Yeah, come on.
Mike: No, you’re right. For three or four years, it was home. When I began in business, it was a packager of third party information.
John: An aggregator.
Mike: An aggregator, packager, and distributor of third party information. It didn’t supply any of its original content, best as I know, perhaps outside the cover art at the very beginning. Then it crept into the original content business over time. To me, there were at least some rough…I don’t want to overstate it, rough analogies between what Yahoo was doing. Repackaging third party information and distributing it in a slightly different way or in a new way.
John: Time moves on and Sequoia backs the next and even larger more disruptive player, Google. Can you talk a little bit about that transition and how you’re…?
Mike: The Google investment wasn’t centered around media. It wasn’t centered around news and information. It was centered around technology. The obvious point that the power of the search technology that the founders of Google and their close friends had worked on were superior to everything else that was around.
John: But you saw it early on as an advertising play, right? Or not.
Mike: Initially, Google was going to be a licensing company to…
Martin: It was. It was licensing to Yahoo.
Mike: That was part of the way that Sequoia got involved with Google. Google was licensing its search technology to Yahoo for Yahoo to distribute.
John: When and how does the advertising lightbulb go off? Is Sequoia involved in that?
Mike: The advertising lightbulb went off very early in a tiny way at Yahoo. The first advertisement, I think, was a tiny, inconspicuous Visa advertisement, which provoked all manner of hand wringing within Yahoo. This was a tiny little, I think, probably just a little Visa button or Visa placement on the home page. There was enormous fear that we were selling out to the demons, that this service on the Internet was going to be perverted and spiral downhill into the clammy hands of the capitalists. There were all these outraged emails from the devoted that there was this little Visa advertisement.
But that was in 1995, and I think that year, for pure Internet companies, total advertising revenue was probably under $2 million.
Martin: Part of the reason that we’re all sitting here today and part of the reason that we’re doing this oral history is because a lot of the traditional institutional journalism entities… I mean, you can see what’s happening at Time, Inc., now and others, are really troubled. The business models are difficult. From your perspective in the valley, what is it that the legacy folks are doing wrong, if anything, and do you think they have a future?
John: Could they have done anything differently that would have made any difference, or was it just the tide is coming in and you swim with it or you swim against it?
Mike: When you have an existing business, it’s a tremendous boat anchor around the corporate ankle. You have existing customers to take care of. You’ve got your daily affairs to take care of. All the confusion of the day to day existence apparent in the newspaper or magazine or TV station. 95 percent of management’s time is worried about putting out tomorrow or next week’s publication or product. A tiny little percentage is devoted to worrying about the business model and thinking about the future, particularly at the beginning.
Then I think there’s also, again, the natural confidence that comes with an established place and the firmament that makes it very difficult to really appreciate the power of some of it…It doesn’t matter what the business is…The power of a young small company and the havoc and destruction it can cause upon your business.
There’s the fear of antagonizing your customers by providing them with something completely new.
I think, on the whole, that media and forms of journalism that have something original to say, have their own content, have stuff that’s really proprietary and have their own voice, as opposed to distributing the wire services or being warmed over versions of stuff that you can find all over the place. I actually happen to think that they have a far brighter and better future than they ever did.
The entities that don’t have really original content I think are going to, obviously, find it extremely difficult to survive in today’s world.
Martin: Why are you so optimistic about that? What would the… Given the downward trends in terms of revenue and profitability in places that create content, what’s the catalyst that turns them around? What’s the catalyst that reintroduces growth into those businesses?
Mike: I think almost every media company management has made one. I don’t want to be too harsh and say terrible mistake. I could be charitable and say failed to appreciate that their business could be a lot healthier if it was far smaller than it is today. It goes against every instinct in management, who have been trained since birth that revenues, increasing revenues every year are the real benchmark of success. But I think a lot of newspapers would not have…
Most newspapers are in this dreadful race between the death of their existing print business and the death of their subscribers. The death of their subscribers is a sure thing. But, again with good reason, they’re very apprehensive about stopping the printing presses.
But if you’re sitting at the helm of a media company that’s got really original content, I would stop the printing presses this afternoon, change the business model entirely to digital. Be completely prepared to have in the short term, far lower revenue, but you’re going to have a much healthier bottom line.
Now, that’s hard, it’s callous, it’s cruel and it’s harsh. But I think that’s what’s going to happen sooner or later to any of these companies.
The thing that people failed to I try to make this point to everybody who comes and talks about magazines and media and everything really appreciate about the enormous triumph of the return of Steve Jobs at Apple was that he shrank the size of the company.
John: To that same point you’re making, one of the things that… Do you have any thoughts on this? It struck me that some big media companies like Time, Inc., for example, they started out as an aggregator and then they discovered data. They had all the subscriber data and they were data driven marketers. RDA, Reader’s Digest was a global data company.
And yet, somewhere along the way, about the time that Yahoo became emergent and then Google became transcendent, none of these legacy media companies invested in all in their data and didn’t transform any of their data.
If they wanted to do what you’re suggesting now, which is to shrink, go all digital, if they had data, if they had developed that data capability, they’d be in a much better place, wouldn’t they?
Mike: I suspect that might be true. I think the other thing that they lacked, again, no fault of theirs, they’d grown up in a different era, was they lacked the engine of these young companies out here. They didn’t realize they lacked the engine. And the engine was software programs.
John: Somebody said the real problem with legacy media…Eric Schmidt said the real problem with legacy media is they don’t have any engineers.
Mike: I couldn’t agree more.
John: But if they had been focused on data, they might be more interested in social…I’m not trying to re write history, but I’m saying that is a place where the road divided. Now, they have no data.
Mike: Best as I can remember, at the helm of America’s largest 50 media companies in the mid 1990s, there were no programmers, there were no software engineers anywhere near the top realm of the company. You could probably have let 100,000 of yesterday’s media employees through the door without spotting one software engineer.
John: What about the next phase? Some people divide the Internet media into the portal era, the paid search era. Now, we’re in the social era. That’s simplistic.
Mike: That’s fine. Or the mobile era.
John: And then the mobile era.
Mike: Where, all these media people who are whinging and moaning and wringing their hands, and here they have an opportunity to market to several billion people around the world, depending, obviously, on the property that they have, who are eager to gobble up information, any time of the day, anywhere they happen to be. That’s the first time that’s ever been possible. I think a lot of people in the media should take great consolation in the fact that record sales for the very first time were up last year because after a decade of having their, to some extent, head in the sand trying to defend yesterday, being utterly litigious, being scared of their future being taken away, the record companies, on the whole, have finally woken up to thinking about the future as an opportunity rather than as a challenge.
I know that sounds glib, but, again, if I was running a media company, that’s what I’d be thinking about. There are all sorts of ways to repackage information. Distribute it far more cost effectively. Gather it in far quicker and more effective ways than ever before.
John: In that environment, do brands still matter at all? Or is it all distribution platforms?
Mike: I think brands matter a lot, and if you have a trusted brand, it doesn’t matter if it’s TMZ at one end and the Economist at the other, you’re going to have a following.
Martin: Mike, I want to go back to this point about engineering because when Eric Schmidt and Mike Moritz make the same point, it’s worth listening to. [laughs] The push back that I often hear about putting engineering more at the forefront of particularly the newspaper companies is that that’s not really their “core competency,” and that these companies are never going to be able to out engineer Facebook, Google, the companies that are in their DNA engineering companies.
That they should stick to their niche, create the original content and maybe have a small engineering team supporting the application value of that content. But they’re not, in essence, tech companies, and they’ll go out of business if they try to be tech companies.
Could you just parse that a little bit for us, because I think it’s a critical point?
Mike: It depends what form. I think both Eric and I aren’t talking about the sort of engineering that would bring about a huge change in something very foundational. What we’re talking about are engineers and programmers who are capable of using tools built by others in artful and creative ways to help with the distribution of content from a media company. That’s what we’re both talking about. We’re not expecting the “New York Times,” as you put it, to outmaneuver Facebook or whatever the next Instagram happens to be. It’s not going to happen unless they get incredibly lucky.
But being able to have a very capable group of people who can create and manage websites and mobile properties and quickly take you onto tablets and do so in very interesting ways for the consumer. That’s very well within the reach of…Or it certainly was within the reach of the well heeled US media.
Martin: Absolutely. I think the struggle has been, and as someone who has been through this directly, it’s just something I’ve noticed. It’s often a cultural struggle between the legacy processes and the introduction of these engineering talents and processes, as well. Who’s in charge? Who gets to make decisions about products and what those products do? And so, oftentimes, you have a kind of freezing up, if you will, because the product direction is sometimes unclear. It’s hard…
Mike: I agree. That’s what’s been lacking for so many of these companies, that you don’t have anybody at the top or the senior management is not given the authority to take a fairly sizable risk, perhaps a huge risk, and embracing a very different future. In the collision of yesterday and tomorrow, for all of these companies, or for most of these companies, it’s yesterday that’s triumphed.
John: We have run across two distinct schools of thought, in looking at the landscape going forward. One of them is that legacy media companies will continue to decline and they ultimately will be absorbed into some version of either the super stacks or a social giant. The other view is one that, why would anybody invest in low growth businesses? In the past, I remember calling you once, evaluating a potential deal that I was asking you about. You said, “I think I would think of it as a small island in the South Pacific during World War II, best flown over and ignored.” I have a guess where you might come out on this answer. Is it some of both or clearly one or the other?
Mike: Most of the existing media companies who don’t have their own content will go the way of the dodo. No doubt about that. There will be a few that are able to engineer a leap over this gulf. But we all know the industries where the makers of horse carts or locomotives weren’t the leaders in the next form of transportation. It’s no different in the media business.
John: But they usually turn up somewhere down the food chain, in some odd place. Like the buggy whip manufacturers are Caleco, manufacturer of the Cabbage Patch Doll.
Mike: Yeah, they wind up as interesting, amusing asterisks in the history books. But that’s not a very profitable place to be.
John: But you don’t see these super stacks, social media giants or anything gobbling up legacy media?
Mike: It’s happened a little bit already. I don’t know how you feel about, for example, Google’s purchase of Zagat’s guide. I think of that as an acquisition.
John: Actually, they’re buying a user generated content business, which makes a lot of sense.
Mike: It’s a media business.
John: You’ve been singing that song for decades.
Martin: I think it would be more interesting if Netflix bought a studio or something like that.
Mike: I think it will be a mixture.
John: Or Twitter bought The New York Times.
Mike: I think some of these properties eventually will wind up in other peoples’ grasp, but no fast growing Silicon Valley technology company is going to go and encumber itself with a slow growing business that hasn’t already, I think, put itself well on the path to success tomorrow, because their opportunities are too big to worry about that sort of costly management distraction.