Friday, June 28, 2013

Venture Capital

“Writing the check is the easy part.” Genentech, Apple, Intel, Cisco, Oracle, … none of them would exist, nor would a hundred others that created billions of dollars worth of new wealth by delivering new inventions.  More than the money – though there was that – venture capitalists brought expertise in management and marketing, guiding start-ups, connecting people with each other, sometimes even making the most difficult of all decisions, to fire the founder CEO for the good of the company.

Everyone knows Steve Jobs and Steve Wozniak; many recognize Nolan Bushnell, Gordon Moore, and Mike Markkula.  Fewer have heard of Arthur Rock, Tom Perkins, or Don Valentine.  Something Ventured (website here) is their story, the viewpoint of the venture capitalist.  They are a humble lot.  At the end of the movie, they admit that writing the check is the easy part. Without the inventors, the creators, the innovators, the visionaries, they would have nothing in which to invest.  But, invest they did – and do. 
 “They saw opportunity where others only saw risk.”
Arthur Rock was working as an investment banker when his firm received a letter from a group of engineers and scientists who were unhappy working for Nobel laureate William Shockley and were looking for an employer to take them all as a group.  Rock convinced them to start their own company.  Rock approach thirty-five companies – Chrysler, National Cash Register, Curtiss Wright, Borg Warner, Ford, Champion, Motorola, Magnavox, … - and no one wanted to invest.  Then, Arthur Rock met Sherman Fairchild.

Fairchild Semiconductor led to the “Fairchildren” the entrepreneurs within the “Traitorous Eight” of Shockley’s lab who would go on to form their own firms with other venture capitalists backing them. 
“I do not know how to write a business plan. I only know how to read them. We start at the back; and if the numbers are big we read the front to see what kind of business it is.”  (Tom Perkins investor in Genetech, AOL, Compaq, and Amazon).
When Dr. Tom Kodadek spoke to the post-doctoral biological student association at the University of Texas (see Necessary Facts here), he touted “angel funding” and warned against venture capitalists who take 30% of your firm.  Like a good scientist, he admitted that his narrative was a personal story.  Thirty percent is much less than the half that others have been willing to trade for $1 million or $2 million in start-up funding for an idea that might be (at best) three pages badly written.  Venture capitalists have vision.
“We turned down Jobs and Wozniak.” (Don Valentine) “What are you going to do with a computer in your home? Put recipes on it?” (Pitch Johnson)  “I sent my partner down to look at it and he said, the guy kept me waiting for an hour and he’s very arrogant, and of course that was Steve Jobs!” (Bill Draper)  “They offered me a third of Apple Computer for $50,000 and I said, ‘Gee I don’t think so… ” Nolan Bushell.  “… but I said, ‘Call Don Valentine.’ … and Steve asked me, What do I have to do to have you finance me and I said, you need someone who knows marketing and distribution and he said, Fine, send me three people and one did not like him and one he did not like and the third was Mike Markkula. Mike Markkula worked with me at Fairchild before he worked at Intel.” – Don Valentine. 
Mike Markkula wrote the check for Apple and his first order of business as CEO was to build a board of trustees and his first call was to Arthur Rock.  “Arthur said, ‘I want to put some money in that company,’ and I said, ‘Then you have to come on the board.’ His expertise was in marketing and distribution and how to choose people.”
“I was 32. I was retired from Intel, but that’s what I did on Mondays: I helped people write business plans, just because I liked meeting bright people with fire in their belly. ... The business plan said that with $142,000 we could be cash flow positive in nine months.” – Mike Markkula about Apple.  
  • Mike Markkula -- $142,000 
  • Arthur Rock -- $57,000  
  • Don Valentine -- $150,000  
  • Apple's 2010 Market Value: $220 billion
The Austrian School of Economics advocates consistent laissez faire.  They are different from the Chicago School, made famous by Milton Friedman.  The Chicago school argues macro-economic policies with its Keynesian rivals.  The Austrians focus on individuals.  Israel Kirzner, Frank Knight, Peter Klein, and others have attempted to understand and formalize—and continue to investigate – entrepreneurship.  However, as individualists, they argue what the word means, not how to produce more of the same by some cookie-cutter process.  That cannot be done.

The "Traitorous Eight" of Shockley Semiconductor
Who Formed Fairchild Semiconductor
Arthur Rock grew up clerking in his father’s candy store from the time he was six or seven.  Don Valentine’s father was a union organizer and once he understood what a union was, they fought constantly.  Dennis Kramlich was about twelve or thirteen when he bought half a freight car of light bulbs from Sylvania and sold them from his wagon.  “I called it the Bright Boy Lightbulb Company.”  Tom Perkins earned a degree in electrical engineering from MIT and found the work incredibly boring. He then went to Harvard Business School where his professor, George Doriot, taught a unique class in entrepreneurship.  (Doriot’s own company, American Research and Development, made only one insightful commitment, to Ken Olsen’s Digital Equipment Corporation.) Doriot’s students included Perkins, Kramlich, Pitch Johnson, and Bill Draper. 
"These were companies with a lot of things missing.  And our approach was always, ‘Is our Rolodex strong enough to help these people?’”  -- Don Valentine.
This film glorifies that individualist tradition of entrepreneurship and investment capital.  No formula exists.  No formula can exist.  Each of the venture capitalists in this documentary has a unique narrative.  In every case it reduces to the same primary: “I thought that it was a good idea.”  Not everything turns a profit.  Ultimately, something does, some ventures do. 
“At the time we started Genentech, there was no such thing as genetic engineering. The risks were enormous.” 
A quarter million invested in Genentech in 1976 became $47billion when sold to La Roche in 2009.  Five million invested in Intel became $90 million.  $1.4 million invested in Tandem Computers in 1974 became $3 billion when Compaq bought the company in 1997.
I was told by a guy at Salomon Brothers, "We’ve heard the pitch, but you did not go to Harvard Business School.”  -- Don Valentine, founder of Sequoia Capital, investors in Apple, Cisco, Oracle, Electronic Arts and LSI Logic. 
  • “There are no firm rules in the venture capital business, except that there are no firm rules.”  Reid Dennis
  • “I would trust him with my life, but not with my money.”  Eugene Kleiner.
  •  "You gotta get money from strong people because weak people don’t invest in tough times, but that is when most of the big winners are created. ”Jimmy Treybig, co-founder Tandem Computers.  
  • “I am not interested in entrepreneurs who want to do things our way. I am not interested in entrepreneurs who come with a dress code. I am interested in entrepreneurs who want to something new that preferably becomes big.” -- Don Valentine
 For all of its individualism – and Donald Valentine is a supporter of the Ayn Rand Institute – capitalism depends on the bourgeois virtues of community. (See the works of Dierdre McCloskey.)  To fund Atari, Sequoia found Fidelity Ventures and the Mayfield Fund to share the burden of risk in return for the opportunity of profit.
PowerPoint was like the Night of the Living Dead, a company that never failed, but just sucked a lot of life out of other people…. until it was sold to Microsoft…


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