Tuesday 16 October 2007

The Seqouia Venture Capital Visit

MBA Global Elective: Seeing the Wood for the Trees – 11 October 2007 11/10/2007
by Justin Spratt

“Venture Capital in the United States contributed 17% of GDP over the last 35 years and 10mn jobs,” according to Roelof’s presentation to us today. In contrast, venture capital represents only a tiny portion of private equity raised – 0.2% in 2006 (Venture Impact 2007, Global Insight). Clearly, this type of investment class is highly effective. From a financial theory perspective, it debunks the returns relative to risk postulate. For every dollar invested, venture capital in the USA created $5.45 in revenue over the same 35 years. A phenomenal achievement by any standard.

Meeting Roelof, a senior partner at Seqouia (a coniferous tree, a name given to the company in the hope that it would outlive any individual partner), was inspirational for all of us in the venture group. A South African, Roelof spent some time at McKinsey in both South Africa and Ireland, before coming to America to attend Stanford’s GSB (www.gsb.standford.edu). While at Stanford doing his MBA, he was forced to start working with the rand depreciation (around the R10 to one time) and his savings falling in toe.

Ironically, this was quite fortunate because he started working at a then small internet payments company called PayPal (www.paypal.com), later acquired by ebay (www.ebay.com) for $1.5bn. He was the CFO before and throughout the buyout and this exposure, plus some new found wealth, opened a door to a partner role at Seqouia, where he now works along with 6 other partners. Seqouia was an early stage venture capital investor in PayPal and arguably reigns as the leading Venture Capital company in the internet space, if not the entire country.

Some of the Sequoia Investments

The presentation gave many of us food for thought on how we can do this in South Africa. Clearly there are many obstacles, most of which are camped in the Portarian theory of competition and clusters. The US government involvement at the enablement level is superb – infrastructure, pro-company laws (bankruptcy especially), education, tax incentives, and so on – while at the same, keeping actively uninvolved. The positive economic externalities of this enablement flow into the technology space in Sillicon Valley and result in a turbo charged economic engine. Once established, clusters like this provide a virtuous symbiosis, reinforcing the positive elements that established it. It appears to us that the South African government should scrap the expensive MIDP and similar government meddling and spend its time, money and effort at the enablement levels. Until such time, it would appear that a replication of a Silicon Valley in South Africa is Herculean task at best. A couple of us will probably give it a try though, which should be fun.

Speaking of fun, we spent time in San Fran yesterday seeing Alcatraz (1576 prisoners over 29 years), after our Ideo (www.ideo.com) visit; the Bay areas, the famous Lombard Street, before stopping in the city for a couple of drinks, close to Union Square. Today we also went to Stanford University.

Prior to San Francisco we were in Seattle. There we visited University of Washington, a serial entrepreneur Bill Bryant, Boeing, Pike Place market, a Seattle Mariners game and the Space Needle.

Tomorrow morning we are off to New York. We will send another update from there before we head back to South Africa.