CALIF. magazine: history of venture capitalism

WHAT: Venture Capital WHO: William Draper, Eugene Kleiner, Armas Clifford Markkula, Jr., Tom Perkins, Arthur Rock, Don Valentine Connecting dots and dollars Elizabeth Corcoran Mark Matcho Venture capital took root in Northern California thanks to one thing: connections. That web of connections has turned out to be the most powerful renewable resource that California has ever had, spawning a business phenomenon in the late 1980s that relied on private investment and merchant banks, that at its height in 2002 produced 7,812 deals worth $104 billion and made Sand Hill Road in Menlo Park America’s most important startup hub. In the late 1950s, East Coast banks were flirting with the idea of making investments—not just loans—in new companies. (Digital Equipment Corporation got started with a $70,000 investment in 1957.) Meanwhile in California, a group of blisteringly smart young scientists needed $750,000 to launch a company in the new area of semiconductor electronics. Where to find the money? One of the group—Eugene Kleiner—knew his father had an account with a solid investment firm in New York City. Kleiner wrote a polite letter to the banker who managed his father’s money, describing his friends’ diverse experiences in electronics, metallurgy, and chemistry, and asking for help in securing funding. In 1972, Kleiner and Perkins raised the largest venture investment fund the world had ever seen: a whopping $8 million. Amazon, Sun, Genentech, Intuit, Verisign, Google all owe their starts to KP. The letter wound up on the desk of a colleague, Arthur Rock, a recent Harvard MBA with a keen interest in technology. He flew to California to meet the group. During the summer of 1957, Rock and his colleagues called nearly three dozen companies to try to raise more than $1 million to launch the firm. They were stonewalled. At last, they met millionaire Sherman Fairchild, the single largest shareholder of IBM Corp. With his support, the group started Fairchild Semiconductor Corp., as a division of Fairchild Camera and Instrument, in September 1957. Within 18 months, Fairchild would file for a patent on the integrated circuit. Fairchild marked the beginning of Silicon Valley, and the first venture deal in Northern California. "If there hadn’t been this deal, I think the [men] would have gone their separate ways and ... I don’t think there would have been any silicon in Silicon Valley," Rock recalled during a 2002 symposium at the Computer History Museum. The Fairchild incubator would give birth to virtual dynasties of silicon companies and investment firms. Among them: Don Valentine, who worked at Fairchild for seven years, helped start National Semiconductor—and later became one of the Valley’s leading venture capitalists by placing early bets on Apple, Atari, Cisco, Oracle, and Electronic Arts. Eugene Kleiner teamed up with a Hewlett Packard manager, Tom Perkins, to start the venture capital firm Kleiner Perkins. In 1972, Kleiner and Perkins raised the largest venture investment fund the world had ever seen: a whopping $8 million. Amazon, Sun, Genentech, Intuit, Verisign, and Google all owe their starts to KP. When Berkeley grad Gordon Moore and Robert Noyce, two of the cornerstones of Fairchild, decided to quit in 1968, they called Rock. This time, it took Rock fewer than 48 hours to raise $2.5 million to fund Noyce and Moore’s new company, which they eventually named Intel. In the 1990s, Kleiner Perkins began promoting the Japanese concept of keiretsu, an interlocking network of companies funded by KP venture capitalists, which share experiences, insights, knowledge, and information. That concept took hold as the zeitgeist of Silicon Valley, as more and more companies were created to complement each other. The populizer of the idea was John Doerr—who got his start at Intel. Not all webs are perfect, however. Tom Perkins once skipped a meeting with an unknown entrepreneur who seemed to be promoting a "computer kit." Venture capitalist William Draper sent a colleague to check out the same entrepreneur—and was told that the young man was "arrogant" and late for the meeting. Draper passed on the investment. Instead, it fell to another Fairchild alumnus-turned venture investor— Armas Clifford ("Mike") Markkula, Jr.— to have the pleasure and the profits of making the pivotal investment in Apple Computer and Steve Jobs.

http://www.alumni.berkeley.edu/calmag/200701/id_venturecapital.asp

Sphere: Related Content

Column: Andy Grove's Re-entrance

Letter From Silicon Valley

12.18.06, 6:00 AM ET
Burlingame, Calif. --Andy Grove understands how to make a re-entrance like no one else.

Not the pop-star flounce onto a stage, heralded with flashing lights and throbbing background music. But the kind of entrance that matters--the ability to look at a growing problem that surrounds him, step away--then come back in with a fresh solution.

I was reminded of this skill recently when the retired Intel chairman joined Harvard Business School professor Richard S. Tedlow onstage recently here in Silicon Valley to discuss Tedlow’s newly published biography, Andy Grove: The Life and Times of an American.

At 70, Grove is still wiry and hip enough to sport a black leather bomber jacket, even though his hands tremble slightly due to Parkinson’s disease. He smirked as Tedlow described how Grove originally told him that the idea of someone writing his biography was the “stupidest idea” he had ever heard. But Grove quickly relented and gave Tedlow his full cooperation.

What comes through in the biography and in the discussion onstage with Tedlow is how Grove made his biggest decisions: by stepping outside himself and viewing the situation coolly, at a distance.

Case in point: a fateful decision in 1985. At the time, Intel was reeling from losses in its memory chip business due to sharp competition from Japanese manufacturers. Grove had spent months wrestling with the problem, including petitioning the U.S. government to take action. Frustrated, he asked Intel co-founder Gordon Moore, "If we got kicked out and the board brought in a new CEO, what do you think he would do?" Moore’s answer: quit making memory chips. "Why shouldn’t you and I walk out the door, come back and do it ourselves?" Grove responded. So they did.

Intel faced an similarly crucial juncture in the early 1990s when Grove had to bet the company on a single chip design direction: Should Intel continue making its x86 class chips or should it follow a more technologically elegant approach called “reduce instruction set computing” or RISC? Intel’s engineers split into warring camps; RISC was the hipper choice, the one that seemed to prove that Intel’s engineers were the best. Grove even took part in a jocular in-house Intel video in which he wore dark sunglasses and rapped about the virtues of RISC chips.

Still, Grove listened when colleagues approached him with a nonengineering-based argument: Abandoning the x86 architecture, they said, would leave Intel’s huge base of existing customers stranded. None of the software written for x86 chips would work smoothly on the newer design. “They saw through all the technical mumbo jumbo,” Grove recalls, “and focused on the most important, basic factors.” Grove stepped away from his own inclination to pick a more technologically sweet solution and stuck with the x86 design. Intel’s value soared.

Grove was slower to step outside his own beliefs when customers discovered a subtle flaw in the ability of Intel’s Pentium processor to carry out certain types of arithmetic functions. Grove dragged his feet on apologizing to customers until the howling both inside and outside of the company was deafening. In his book, Tedlow describes the Pentium gaffe as Grove’s biggest mistake.

Onstage with Tedlow, Grove was impatient with that choice. Yes, a mistake. But his biggest? Grove says he agonizes every day that he didn’t leave Intel with a clearer road map for the future. Intel’s most recent track record has been mixed. Its high-end chip, Itanium, which took root during the end of Grove’s tenure, proved too ambitious and left the company vulnerable to competitor Advanced Micro Devices. Intel is also still seeking a clear path in a world where countless little handheld electronic devices are emerging as the next new thing.

Tedlow countered that Grove was asking too much of himself. “Every generation has to solve the problems it faces,” he told Grove and the audience. “It’s hard to solve the problems that will happen 10 or twenty years out.”

“That attitude brings an anti-investment, pro-short-term perspective,” Grove snapped back. “Some problems take longer than the tenure of a CEO,” he added.

These days, Grove has taken on a couple of other big problems, ones that will certainly take more than a few years to right: improving the U.S. health care system and preserving America’s separation of church and state.

Once again, Grove is trying to step outside his personal concerns to see the problems in a clear light. Almost a third of all Americans lack adequate health care and increasingly turn to hospital emergency rooms for simple medical care--a disaster in the making, worries Grove.

Existing technology can help, he believes. Grove is a fan, for instance, of walk-in medical clinics at drugstores instead of emergency rooms for many procedures. He advocates keeping people’s medical records in PDF files on the Internet to cut costly mistakes and unnecessary procedures. Wireless sensors that kept elderly or infirmed patients in close contact with medical providers could help them stay in their own homes instead of heading to nursing facilities. “We’re using technology to achieve extraordinary care for a few people. What intrigues and motivates me is the idea of using mass technology to help many more,” he says.

Just as important, Grove believes, is protecting the U.S. from the kind of sectarian strife that has ravaged so many other countries, including his native Hungary, where he saw relatives suffer first at the hands of the Nazis and later under the Communists. A clear separation of church and state--as set forth in the U.S. Bill of Rights--is essential for creating an environment in which people can believe what they choose and tolerate differences among their neighbors. Grove is supporting an online petition drive calling for the renewed separation of church and state.

Stepping outside your own concerns and pride, finding a new solution and then reentering is tough for any of us. It’s far easier to pontificate on other people’s problems than to see our own clearly. But as Grove has shown, true self-awareness can be our most valuable asset.

http://www.forbes.com/2006/12/16/intel-andy-grove-tech-cz_ec_1218valleyletter_print.html

Sphere: Related Content