Start up with unrealistic expectations

Insights into the world of start-ups from Michael Moritz, a partner at Sequioa Capital, one of the most successful venture capital firms in the world.

The Financial Times interviewed Moritz and reports his views on some of the biggest successes (and not-so-successes) of the internet era, as well as the pursuit of the next big idea whose time has yet to come.

As he discusses some of the start-ups he has worked on, the lessons Moritz draws for building a business from scratch sound disarmingly simple, the FT reports. One is to pick the right market – and the right basis for competition. And being in a fast-growing market is essential. To hear him talk, investing in Google was an easy choice:

You didn’t have to have an IQ in the three digits to work out that people were going to want to search for more and more stuff on the internet.

More choice words of wisdom:

Being in a difficult market or choosing to compete on the wrong terms can negate any amount of good management. Example – Flextronics:

It’s a Herculean company to manage. And for the amount of effort that’s required, the company deserves higher margins. But the competitive environment is such that the margins are always under pressure.

Being in the right market with the right business model may be a prerequisite but it does not by itself guarantee success. Example – Webvan:

Webvan was a victim of its time: the basic premise was fairly sound. The mistake we co-operatively made was we expanded too quickly, we had too much infrastructure. If we had developed the company the way most retail companies develop, which is carefully and slowly, tweaking everything until you get the execution more refined before you go and roll out into other areas, I think we would have been fine.

The setbacks that come early often turn the first year into a struggle for survival. Example – Google:

The first year at Google was no friggin’ honeymoon. There was no business. We were off in pursuit of [corporate customers] and trying to license the search engine, there was no money coming out of it, cash was declining. Things did not look too rosy.

It was only later that Google came upon the advertising business that is the foundation for its commercial success, the FT says.

A soaring share price – and the volatility that can follow – can be the most damaging thing of all for a young company. Example – Google again:

People underestimate the impact a fluctuating stock price can have on the morale of a company. It’s very corrosive, it’s distracting, it’s a big, mesmerising diversion. It is better to stay private as long as possible [as Google did, though largely because of the dotcom crash that ended the IPO goldrush of the 1990s, the FT says]. You don’t have everyone in your company either hopping out of their shoes when the stock goes up or very depressed when the stock goes down.

Now public, Google has so far only experienced the former.

The FT calls Moritz "a professional optimist," reporting that he shows no such doubts himself. While not predicting where the next Google will come from, he is sure there will be one:

I have no idea what the next big thing is, but I am pretty convinced that someone in our general community will have another. It’s a perpetual stroll into the fog – anyone in our business who says otherwise is being deceitful.

Moritz’ bottom line – think big, and don’t be put off:

You need unrealistic expectations. If you don’t have unrealistic expectations, you’re going to fall short. We always treat forecasts with a grain of salt, but it works both ways. When a company hits a gusher, we are as surprised as the next person.

Financial Times | Start-ups are ‘a perpetual stroll into the fog’ (paid subscription required)