HOW a Botha made bil­lions and shook up Sil­i­con Val­ley

Finweek English Edition - - Front page - FRIK ELS

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

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