The Age of the Unthinkable (18 page)

But if Farkash had mastered this instinct, if his Yoda-like prescriptions to his staff had yielded a relatively successful
and surprise-free time in office for him, it remained a highly personal accomplishment. He was unable to inculcate it even
into the “small” Israeli defense bureaucracy. Six months after he left office, Israel launched that disastrous 2006 air war
against Hizb’allah. The strategy was classically old-school: pound the visible Hizb’allah to kill the invisible. Sure enough,
Hizb’allah evolved exactly as Farkash would have predicted; it changed in midwar by finding new ways to communicate that Israel
couldn’t penetrate and by developing battlefield tactics the IDF hadn’t trained for or even imagined. It wasn’t that there
was some problem with Israeli airpower or with the accurate spy-satellite and drone photos they possessed of every Hizb’allah
redoubt and rocket site. Israel had started the war with what its commanders thought was an almost perfect picture of Hizb’allah.
“This time, it will be the end,” they said. It wasn’t. What went wrong? The problem wasn’t the Israeli planes or the exhausted
and unprepared ground troops. Rather, it was a battle plan that aimed impatiently at Hizb’allah’s surface, missing the deeper
muscles that drove the group. Israel’s defense establishment, Farkash confessed to me, was infected by a way of seeing the
world so fundamentally flawed that it was possibly the greatest threat Israel faced. That’s a conclusion that should make
us wonder at least a little about our own habits of seeing as well — and about how we might change them.

Sometime in the summer of 1999, Michael Moritz, a Silicon Valley venture capitalist, received a call from one of the founders
of a firm he had backed several years earlier, asking him to take a meeting with an upstart Internet company. The call was
not unusual. In Silicon Valley, home to the most dynamic information technology firms in the world, business is still often
conducted in a manner that reveals the deeply personal roots of the place: friends invest in other friends’ companies, share
technology and ideas, and work together even as they compete.

Moritz, who was then in his mid-forties, was a partner at Sequoia Capital, one of the Valley’s oldest venture firms, and he
had developed a reputation as a masterful talent spotter of Internet companies. The founder calling Moritz was ringing about
another, smaller firm he had been impressed with. The firm was operating in an already crowded sector of the Internet business,
providing online search services in the same way companies such as Inktomi, Ask Jeeves, and a dozen others did. But Moritz,
who often looks at a dozen possible investments in a week and had already been keeping an eye on the firm, agreed to the meeting
and found himself unusually impressed. So, even though the field was packed with competitors, Moritz decided to make a significant
investment.

The decision, however, flew in the face of what was a lot of pretty well established wisdom about how to make money in Silicon
Valley. To begin with, the search business was very crowded. The firms already in the game had billions to spend hiring the
smartest engineers and puzzling out the fastest search algorithms. The list included not only such giants as Ask Jeeves and
Yahoo!, but also established media and technology companies such as Microsoft and America Online. The key to astronomical
returns for venture-capital investors was usually getting into new businesses early, before giant and well-financed competitors
arrived. Getting in late, backing a small firm that was essentially a wholesale provider of search services — this was exactly
the sort of investment that several decades of experience suggested should be avoided. It wasn’t so much that the management
team of the new firm was inexperienced (both were still in school at Stanford) or that the name of the firm didn’t make much
sense to anyone; it was simply that the overwhelming lesson of history was clear. Nearly a dozen other investing firms in
the Valley had reached a similar conclusion about the firm, deciding to pass on an investment. Why should Sequoia be different?
But in the face of skepticism — and even a small bit of local derision when the $12.5-million investment was announced — Moritz
persisted. Six years later Sequoia’s stake in Google would be worth billions.

There was, as we are about to see, something special about Moritz. Silicon Valley, sort of like Israel (and our sandpile world),
was a place that was filled with surprise and unanticipated danger (and opportunity to make a killing). No business was really
safe from innovation: Yahoo! could think it owned search only to find itself trashed by Google; Motorola might think it had
control of microchips for cell phones only to discover Intel eating its lunch. The Valley, the heart of so much American innovation,
is a place where the revolutionary spirit of our age is particularly alive. But that also means the challenges of working
there, of staying alive yourself, especially if you are an investor, are like the ones Farkash faced: rapid and surprising
change that could come out of nowhere (a dorm room at Stanford) to remake the landscape. How you should look at such a world
was as important a question for Moritz and his investors as it was for Farkash. What Farkash had figured out was that understanding
a sandpile meant looking deeply into the pile, not simply relying on outside-to-inside satellite techniques. In Silicon Valley,
Moritz was perfecting another important technique. How, against a landscape of thousands of start-up companies, tens of thousands
of engineers, and billions of investment dollars, could you pick out the kid who was about to make history?

Investments like the one Moritz made in Google are myth-making. But they are, to be honest about it, very, very unusual. The
thousandfold returns for early shareholders in firms like Netscape or Yahoo! were a sort of greed magnet that drew cash into
venture capital in the 1990s. But the reality was that a decade or so later the returns on venture-capital-fund investments
had barely outpaced the S&P 500 — and with a great deal more risk. Most venture capitalists dump money into companies you
have never heard of, working on products you’ll never use, and run by entrepreneurs whose dreams far outstrip their reach.
Eighty percent of venture-backed firms fail altogether; most of the rest return double or triple their money, which looks
great but has to be offset against the millions lost on the bad ideas.

Yet in this environment of expensive, risky mediocrity, Moritz and one other venture capitalist, a former microchip salesman
from Intel named John Doerr, who works on Sand Hill Road just down the street from Moritz, stood out. (The street’s name,
in one of those accidental tributes, captures perfectly the complex dynamics Per Bak would have spotted at work in the Silicon
Valley.) Moritz had not only picked Google out of that pile of mostly forgettable failures, he’d also shaped investments in
Yahoo!, Pay Pal, YouTube, and a long list of other successes. At one point companies Moritz and Sequoia had funded accounted
for 10 percent of the total value of the Nasdaq. A list of the firms he had discovered, nurtured, and taken public from his
office in Menlo Park (“I don’t like any investment more than thirty minutes away,” he once told me) looked like a day trader’s
dream portfolio. While you might think this was because Moritz and Doerr were gifted technological geniuses, übergeeks with
cash, you would be wrong. Übergeeks, like Microsoft’s cofounder Paul Allen,
had
gone into the venture business during that 1990s bubble. Almost as a rule, they had blown up spectacularly.

Moritz was probably the greatest technology investor of his generation, and what set him apart was this weird quirk: he didn’t
care so much about the technology. Any number of venture firms — maybe even most of them — were stuffed with Caltech and Stanford
Ph.D.s who could easily outscience Moritz, a crisp Welshman who held degrees in literature from Oxford (he once wanted to
be Norman Mailer) and in business from Wharton. It wasn’t that Moritz didn’t understand the technology, it wasn’t even that
he didn’t think it incredibly exciting — he did. The difference was that he didn’t place it at the center of his thinking.
When he looked at the Valley or at a company, he looked differently. “What sector in technology investing are you excited
about today?” he was once asked in an interview. “That’s independent of where we choose to invest,” he said.

This koan-like conclusion signaled a very different way of seeing. If you and I were starting a venture-capital firm today,
we’d probably go out and hire a bunch of engineers who knew the technology and some finance guy who could work on the deals.
Then we’d most likely lose a ton of money. Moritz’s point — and it was a point that made him hundreds of millions of dollars
over the years — was that success in a rapidly changing business like technology wasn’t determined by gear or deal structure
or even genius. Rather it was determined by the hard-to-predict, always-changing interaction between the context and the company.
His job was to pay attention to both, to adjust the context as much as he could (which wasn’t usually very much), and to be
obsessive, even impolite, about adjusting the company as fast and as often as necessary. Moritz’s special genius was to do
this, not in reaction to the market but ahead of it. This process of trimming and sculpting his companies never ended. The
lesson of the Valley was that the moment it stopped, companies were usually blindsided by new competition (see Yahoo!) or
bankrupted by a market that no longer wanted their products (see Atari). “A year in the world of technology,” he once explained
to me about that Google investment, “is an eternity. What might be perceived by others as a late entry into something isn’t
always quite like that.” When he first made his investment in Google, he confessed, “No one understood what it would be, no
one had the faintest clue.” Google wasn’t born great; it became great. And how this happened had everything to do with the
way Moritz operated, and how he saw the fast-changing world around him.

As Moritz watched his competitors at work, making one expensive mistake after another, he became convinced that often it was
the very expertise of other venture capitalists that killed them. They obsessed about the technology or about the transformative
powers of the Internet itself. There was a double trap at work here. The first was a too-strong faith in technology, as if
the fate of a firm rested on the quality of its ideas alone, not on the complex interaction of those ideas with the world;
the second was the old scientist’s habit of breaking problems into pieces to solve them. In the same way you might answer
a hard math problem by solving it bit by bit, engineers–turned–venture capitalists tended to look at companies as a sum of
their parts. It was a deadly instinct. Moritz was the first to admit that his own mistakes, and he had made plenty of them,
usually came from these kinds of math errors, from thinking that the combination of team and idea would be enough. In fact,
no amount of spreadsheet mechanics would have convinced you in advance that Google was a likely home-run investment. “Parts
of the critical system,” Per Bak once wrote about complex networks, “cannot be understood in isolation. Studying the individual
grains under the microscope doesn’t give a clue as to what is going on in the whole sandpile. Nothing in the individual grain
suggests the emergent properties of the pile.” Studying Google’s tech in isolation told you very little about the firm’s potential
value. So you had to learn to look at everything at once.

If you weren’t accustomed to his methods, of course, working for Moritz could be disorienting. He was constantly pushing his
companies for quick pivots. No “plan” lasted longer than necessary. There was only ceaseless interaction and experimentation.
What Moritz had discovered was that good companies were flexible, and he had learned to look for that. If you had a company
that could shape-shift fast enough and a mind like Moritz’s that could see what was needed, then you were in a very good position
to avoid the mistakes of investors who stared obsessively at their cool geeky solutions wondering why the world didn’t care.
In fact, most of Sequoia Capital’s biggest hits were companies that had started in their own offices, close enough to Moritz
and his partners for them to ensure that they were being shaped in exactly the right way, like young trees putting down that
first, all-important root base. YouTube, a company that returned hundreds of times its initial investment for Sequoia when
it was sold to Google, spent a third of its entire life as an independent company just down the hall from Moritz. You can
imagine that working for a company he had funded could be exhausting. Even if you were the CEO of a firm you had dreamed up
yourself and built from scratch, you often couldn’t see what Moritz saw; you were wandering sleepless, worrying about your
technology or your employees or some imagined idea of how your firm would destroy Microsoft. Moritz, however, was seeing beyond
all of that, and, if you listened to him, he was probably going to make you very, very rich.

Watching Moritz think through an investment was like watching one of those Evelyn Wood–trained speed-readers who could take
in an entire page at a time instead of slogging through a book word by word. He devoured information, sucked up more data
about an entrepreneur in an hour than a psychologist might do in a month of private sessions. Moritz’s genius was that he
wasn’t cutting companies up as he looked at them but placing them in context. The forces shaping a technology market, consumer
demands, changes in software design, shifts in microchip pricing, the up-and-down emotions of a founder — he was watching
all of these for signs of change. His point was that you might have a dream of what you wanted to do — index the Web, help
people talk as they traveled — but unless you constantly refined that dream, constantly updated it, your chances for success
were limited. For this reason, one of the critical features of the tech business is the constant revising of products, operating
systems, and software. There is no right, final “view” of the world. Rather, the correct image is more of a manic movie: World
1.0, 2.0, 3.0 — and so on into history.