HOW a Botha made billions and shook up Silicon Valley
FIRST IMPRESSIONS of Silicon Valley can be disappointing. The global technology Mecca on the West Coast of America comes across as a soulless, arid place. Much of it is kilometres upon kilometres of squeaky clean, wide roads devoid of pedestrians, lined with row upon row of office parks (or campus, the preferred term there) interrupted only by the occasional drive-through fast food outlet. Yet, since the semiconductor revolution of the Seventies, through to the personal computer boom of the Eighties and the rise of the Internet, the place has given birth to many of the most creative companies in the world.
Among thousands of others, wellknown firms such as Apple, Cisco, Yahoo!,
PayPal, Electronic Arts, YouTube, Google and Oracle, all started and continue to thrive in Silicon Valley. These companies have something else in common: they were all funded by a venture capital firm called Sequoia Capital. Sequoia dates back to 1971 and can lay claim to being the first investor in companies that make up 10% of the Nasdaq’s value.
Sequoia’s Google bonanza is eye-popping. It paid $12,5m for 5% of the search engine in 1999. At listing in 2004, a 5% stake in Google was worth over $2bn (today it’s $7bn). Apart from Google, Sequoia’s biggest payday since the boom times of the late Nineties came courtesy of lead partner Roelof Botha (33).
In October last year, Botha persuaded Google, by then worth $130bn, to buy a profitless, two-year-old company, YouTube, with meagre revenues and threatening legal issues for $1,65bn. Botha parlayed an $11,5m (R85m) investment in the video sharing website into $504m (R3,7bn) for Sequoia. Not surprisingly, the deal sparked talk of the return of the dotcom bubble. YouTube was a leader of what was being called the second generation of the Internet or Web 2.0 (see accompanying article). In Silicon Valley venture capital circles Botha was being referred to as “the Web 2.0 guy”. But his involvement with Silicon Valley goes back almost 10 years.
After completing a BSc in Actuarial Science, Economics, and Statistics at the University of Cape Town and becoming a certified actuary at the ripe old age of 22, Botha spent two years at consulting firm McKinsey & Company in South Africa. In 1998 he enrolled for an MBA at Stanford University – for many the heart of Silicon Valley –
Less than six months after listing, he engineered the PayPal sale to giant online auctioneer eBay for $1,5bn.
where he met fellow students and founders of PayPal, an online payment system.
He became the chief financial officer of the company (incidentally PayPal was cofounded by another South African, Elon Musk) while still working on his MBA. Botha also successfully took the company public at a time – early 2002 – when the appetite for dotcom companies was limited to say the least. Market scepticism and last-minute lawsuits almost scuppered PayPal’s money raising, and the environment and competition for the company was only getting tougher. Then Botha pulled off the kind of deal that would make him famous four years later. Less than six months after listing, he engineered the PayPal sale to giant online auctioneer eBay for $1,5bn.
Says Botha: “Some people make five-year plans. I don’t. It can be called misguided or flailing around, but when I left South Africa, did I think I’d end up the CFO of a publicly listed US company? No. Did I know what venture capital was? No. My background is also actuarial, not engineering or technical, which would’ve been more appropriate for my current job.”
When he first came to Stanford, the investment boom in all things dotcom and IT was still gaining momentum. “I was as attracted as anyone to what was going on here – not just from a business and investment perspective and the enormous creation of wealth. Simply, as a consumer it was amazing to see the very real shift taking place,” says Botha.
The excesses of the time are well documented. From 20-something engineers hired
by online retailers with golden hellos and free use of BMW convertibles (actual story), 19year-olds dropping out of university to become day traders making the most of share prices that never go down, to people with business plans scribbled on napkins with a dotcom in their names having millions thrown at them.
“It was a silly season, but great investments were still being made. It’s often said that the effect of technology may be overestimated in the short term, but almost always underestimated in the long term. Don’t forget, as recently as 1995, email wasn’t part of people’s daily lives,” says Botha.
Botha is dismissive of both Web 2.0 and the renewed talk of a bubble. “Web 2.0 is just a catchphrase; it doesn’t mean much. The question is, is there space for continued innovation? Absolutely. Not only that, there are now signs of new investment going into technology infrastructure.” Botha’s investment philosophy turns about to be similar to his personal philosophy: “Put yourself in the position to take advantage of the opportunities around you; to maximise the value of the options available to you. There’s an expression in the US that comes from basketball that sums it up: ‘Hanging around the hoop’.
“One of the first things we ask entrepreneurs is: ‘Why now?’ The Sequoia – which recently opened offices in China, India and Israel – website has this advice for start-ups: Address existing markets poised for rapid growth or change. (It) allows for error and time for real margins to develop.
“The investment in YouTube was easier because I knew the three guys running it, we were colleagues at PayPal. I believe the foremost criteria are the market opportunity and the size of the market. It’s the one thing you can’t change, that you can’t fix. You can always appoint new people,” says Botha. While the US – and specifically Silicon Valley – still leads the world with IT innovation, Botha acknowledges that the US lags in mobile phones. “Until two years ago you couldn’t send an SMS to a mobile phone from a PC in the US. MTN was doing that in 1996.” Not surprisingly, Sequoia’s first investment in a South African company – decided only this month and not yet inked (says the SA firm) – is one involved in mobile messaging.
Botha believes the venture capital market is overfunded at the moment. “In technology there are very few (businesses) that meet the criteria. Of the 1m businesses that start up in the US each year (out of a total of some 23m) only 1% attract venture capital.” Meebo, an instant messaging provider and another of Botha’s investments, is a case in point. Meebo was started with $6 000 charged to a credit card before the first round of funding led by Sequoia. It now has 5m registered users. Botha’s roster as lead investor includes Adbrite (semiconducters), Luxim (a company manufacturing lamps for projection systems), Meebo (instant messaging), Xoom (money transfer), Zappos (online shoe and accessories retailer),
AdBrite (online advertising marketplace) and Insider Pages.
Insider Pages is like a searchable electronic yellow pages but with reviews on the quality and service of local businesses written by other users. At the beginning of March, Insider Pages was sold for a purported $13m – clear evidence that really big winners like YouTube are scarce. Notwithstanding YouTube, Botha says that realising IT venture capital investment is difficult at the moment: “M&A exits aren’t readily available and not many can be IPO’ed .”
According to the US National Venture Capital Association, 58 VC-backed public offerings raised $5,3bn in 2006. Compare that to the period from the listing of web browser Netscape in August 1995 (the starting gun for the Internet boom) to December 2000. Over this time more than 920 companies with venture capital backing raised $315bn on the markets. “In the mid-Nineties, before the Internet investment frenzy began, IPOs were much easier than today. A whole ecosystem of specialist IT investment banks existed, the cost of going public was much less and once listed you didn’t have additional burden of regulations like Sarbanes-Oxley. The cost of being listed can come to $1m a year – for a company that’s doing $50m annually that’s a material cost.”
Despite the scarcity of listing opportunities and examples of entrepreneurs selling out early, Botha prefers “to stay as long as possible and go as big as possible”. When speaking about regrets, he returns to PayPal: “If we didn’t sell, how much would PayPal be worth now. $10bn?” He also mentions Facebook, which Sequoia walked away from early on, due to a “confluence of factors”. With MySpace and YouTube already flipped, Facebook, which has since grown to 19m young, affluent and educated visitors a month, is now the hottest property of Web 2.0. Facebook’s 22-year-old founder Mark Zuckerberg has already rejected a $1bn takeover offer from Yahoo!. In an IPO, the route the company favours, Facebook could be worth much more. Then Botha mentions almost in passing: “Mark Zuckerberg is a friend of mine. In fact we had lunch just last week.” Is this a hint that Botha may soon top YouTube?
ROELOF BOTHA The venture capitalist who sold YouTube to Google