Real VCs help build great companies
By Don Valentine, photograph by David Toerge - October 15, 2000
The Internet hysteria of the late 1990s made venture capital look easy. Anyone and everyone with a sizable checkbook has been throwing money at even the most half-baked ideas. Getting in on the feeding frenzy has become the goal and somewhere along the line we lost sight of why venture capitalists exist-to build long-lasting companies and industries.
|The short-term, get-rich-quick mentality particularly plagues our local entrepreneurs, specifically the over-educated MBA contingent|
The promise of boundless riches from investing was destined to attract the wrong people-and it did. However, the evaporating fortunes afford us the opportunity to examine the role of venture capitalists with some historical perspective.
First, let's look at the late `90s or, more specifically, 1995, when the Internet gold rush began in earnest. The power of the Internet changed the business landscape. First movers, armed with reasonable business plans, passion and commitment were able to attract VC financing. Problems began when a half-dozen copycats sprung up in every category. First they got the money, then they tried to piece together a business plan, believing that e-commerce could overcome a lack of business sense.
The funny thing is that we should have seen it coming. In the last 30 years, other new technologies that have brought similar waves of mania include microprocessors, PCs, disk drives and biotech.
Nonetheless, the great companies of the past were built to last in the same way the great companies of today are. I'm sure you know their names. The `70s list of venture-backed successes included Apple Computer Inc., Intel Corp. and Oracle Corp. In the `80s, Sun Microsystems Inc. and Cisco Systems Inc. joined the Silicon Valley success list. Today, Yahoo! Inc., Network Appliance Inc. and a few others have set the standard.
Back in the early days of the `70s, the "mission statement" for the evolving venture industry was that we were company builders, and, on occasion, industry creators. This small community included Arthur Rock, George Quist, Bill Hambrecht, Tommy Davis, Bill Edwards, Reid Dennis, Bill Draper, Pitch Johnson, Tom Perkins, Gene Kleiner and myself. We expected to spend 10 or more years on the boards of the young companies in which we invested, actively helping them grow. We were a small band who collectively had comparatively little money to invest-perhaps tens of millions. Compare that to the first quarter of 2000 when `Net firms reaped more than $15 billion in venture capital. Obviously, we've entered an age of excess.
The result is that thousands of totally useless e-commerce companies that do little and will never earn a profit are collectively weighing down the real innovators and creators. And, there are hundreds of so-called "new era venture capitalists" who claim business on the Web is all about market share or eyeballs or some other hallucination in order to "put money to work." Their orientation is to create a "great investment," not a great company or a new industry. There's a better name for these investors: I call them "day-trader VCs." For this group, the Internet is nothing more than a modern day gold rush.
And the short-term, get-rich-quick mentality particularly plagues our local entrepreneurs, specifically the over-educated MBA contingent. They've been seduced by Silicon Valley lore and now want their piece of the pie, without contributing anything to the societal bottom line. They're greedy, pure and simple.
Interestingly, it's the first-generation immigrant entrepreneurs who are setting today's standard when it comes to building sustainable companies. Every one of them I've worked with is a joy-they truly appreciate the opportunity to compete in Silicon Valley.
There's more good news to consider: The built-to-last strategy rewards patient investors. I'm still on the board of Cisco, 13 years after Sequoia Capital first invested. And Arthur Rock has been on Intel's board since the early `70s. We've maintained a long-term commitment to building lasting companies that contribute not only to Silicon Valley, but also to the national and global economies. And the results? Today, Cisco and Intel combined are worth more than $700 billion (as of September 26, 2000) in total market capitalization.
As long as this long-term strategy, and these kinds of returns, are possible-and I submit that they still are-then venture capital will continue to be what it always has been: A company's builder's game. And real venture capitalists will still work to identify technology applications with monster markets that provide opportunities to build major companies for the benefit of the founders, employees and public shareholders.
Don Valentine founded Sequoia Capital in 1972 and was one of the original investors in Apple Computer, Oracle and Electronic Arts. He is the chairman of Network Appliance; the vice chairman of Cisco. Reach him at email@example.com.