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Robert Noyce stood out as the obvious leader. A charmer, a prankster, physically graceful, he was the engineer who had compared Shockley’s recruitment phone call to a divine audience.
The son and grandson of Congregational ministers from small-town Iowa, he worried about the ethics of betraying Shockley. According to one mutineer, Noyce was asking himself, “What would God think?”
Besides, backing the Shockley defectors and allowing them to own stakes in their new enterprise would set a disruptive precedent: What if the backer’s own employees demanded company stock, too?
After approaching thirty-five potential investors, Rock had failed to raise a single cent. Then Bud Coyle suggested Sherman Fairchild, a playboy with an inherited fortune who was a self-described “putterer” and science enthusiast.
Each of the eight founders was invited to put up $500 in return for 100 shares in the startup. The men scraped together the money, but not without difficulty; $500 was two or three weeks’ salary, and Noyce had to call his parents to ask if his grandmother could lend him the funds.
Before Fairchild’s founding, as Noyce would reflect later, researchers wore white smocks and were locked up in the laboratory. But at Fairchild they were out talking to the customers; even before developing their first transistors, they had met potential buyers in military avionics and figured out what kind of device would sell.
For Noyce and his co-founders, it was a bittersweet moment. The Traitorous Eight each received $300,000, fully six hundred times what they had invested two years previously; the bonanza amounted to around thirty years’ salary. But at the same time, Fairchild Camera was doing even better: it was paying a price-earnings multiple of about 1.5 for a spectacular growth firm.
As a result, entrepreneurs struggled to find funding. Their likeliest source of capital came from the retained profits of established businesses—thus Beckman Instruments financed Shockley, and Fairchild Camera and Instrument financed the eight traitors. But this form of funding came with a bias. Established businesses “naturally invest in fields with which they are familiar,” Drucker lamented;
On October 10, 1961, Davis & Rock filed its Certificate of Partnership. Its outside investors included six of the eight founders of Fairchild, some of whom had become Rock’s companions on ski trips and hiking adventures.24 Hayden, Stone invested, too, as did several Hayden clients whom Rock had enriched with his technology tips.
For his part, Rock made a habit of skipping over the financial projections in business plans and flipping to the back, where the founders’ résumés were presented.
Nolan Bushnell, Atari’s twentysomething founder, had no time for the basic disciplines of business. With a six-foot four-inch frame and a shaggy head of hair, he presided over his company like a high-tech Hugh Hefner.3 He kept an oak beer tap outside his office and liked to hold business meetings in a hot tub—either the one in his house or the new one he had installed in Atari’s engineering building.
Valentine also considered raising money from Wall Street. But he lacked the polish and training that preppy New Yorkers expected. He had not attended an Ivy League college or an elite business school, and he hated conceited know-it-alls, a category that he defined to include “people with hyphenated names or roman numerals after their last name, direct descendants of immigrants who arrived on the Mayflower, people who had enjoyed living on the East Coast, and those who wore Hermès ties, suspenders, cuff-links, signet rings, and monogrammed shirts,” as a distinguished lieutenant wrote later.
He was fit and in his early forties, but as he made his way around the factory, he appeared to be struggling. He coughed uncomfortably, then seemed to gulp and hold his breath. As he described the scene later, the building was bathed in enough marijuana smoke to “knock you to your knees.”21
Forbes wondered, “Has the bear market killed venture capital?”27 After attracting $171 million in new funds in 1969, venture capitalists raised only $57 million in 1974 and a mere $10 million the year after.28 A New Yorker cartoon showed two men chortling, “Venture capital!
By the middle of March, Sears had placed an order for seventy-five thousand Home Pong machines.35 Atari now had what Valentine had been waiting for: a promising new product and a powerful distributor. At the beginning of June 1975, Valentine duly invested. He bought 62,500 shares for $62,500, making what would now be termed a “seed investment” in Atari.36 But it was only the start.
In late 1976, a Warner company jet fetched Bushnell and Valentine from California. On board, they were greeted by Clint Eastwood and his girlfriend, Sondra Locke; Eastwood graciously made Bushnell a sandwich.41 When the plane touched down in Teterboro Airport, a limo ferried the Atari people to suites in the Waldorf Towers hotel. That evening there was a dinner at Steve Ross’s palatial apartment, and the group watched an unreleased Eastwood movie together. By the end of the day, a starstruck Bushnell had agreed to sell Atari for $28 million.
The first product that Genentech proposed to manufacture was insulin, for which there was a huge and growing market. The existing way of harvesting insulin conjured up images of medieval witchcraft: every drop of the hormone had to be pressed from the pancreas glands of pigs and cows.
As of 1984, the fourteen investments in the first fund showed a combined profit of $208 million; of that, fully 95 percent came from Tandem and Genentech. Without those two home-run investments, the first fund would have generated a multiple of 4.5x, still comfortably outperforming the return on the S&P 500 over the eleven-year period. With the home runs, the multiple was 42x.
Xerox worried that a computerized paperless office would harm its core photocopying business. Intel and National Semiconductor feared that making a computer would put them in conflict with existing computer makers, which were among their top customers. HP fretted that building a cheap home computer would undercut its premium machines, which sold for around $150,000.
Bill Draper of Sutter Hill sent an associate to visit Apple, and when the associate reported that Jobs and Wozniak had kept him waiting, Draper wrote them off as arrogant.
Rock agreed to meet Jobs. But his reaction was predictable. “Steve had just come back from India and been with his guru or whatever,” Rock recalled later.17 “I’m not sure, but it may have been a while since he had a bath.”18
Rock’s stake had now rocketed 378x, and Rock took a seat on the Apple board, pairing it with his position as Intel’s chairman.
venture capital had achieved escape velocity. In 1978, Congress had slashed the capital-gains tax from 49 percent to 28 percent, greatly increasing the incentive to invest in venture funds.
The low capital-gains tax and the change to the prudent-man rule rounded out a policy mix that was extraordinarily favorable to venture investors. Venture-backed firms could go public without showing a history of profits. Employee stock options were taxed only when they were finally exercised, not when they were initially granted.
In 1978, Merrill Lynch forecast confidently that “future developers of promising technologies, new products and new services are likely to be well-financed divisions of major corporations.”1 It was as though the United States were still locked in the world of IBM and Sherman Fairchild.
But while Sematech helped to cut defect rates and accelerate miniaturization, Japanese manufacturers retained their edge, and the United States gave up trying to compete in the market for memory devices—the segment in which manufacturing quality was the chief differentiator.2 Instead, Silicon Valley emerged triumphant by funneling its energy into new areas: specialized microprocessor design, disks and disk drives, and networking gear that linked up all the new equipment.
Hierarchical organizations can be good at coordinating people when the objectives are clear: think of an army. But when it comes to commercializing applied science, the Valley’s culture of “coopetition” has proved more creative than the self-contained, vertically integrated corporations of Boston or Japan. Large companies bottle up ideas and
First, California law prevents employers from tying up employees in non-compete agreements; talent is free to go where it pleases, unlike in most states, including Massachusetts. Second, Stanford has been generous in allowing professors to take sabbaticals to work on startups, and this permissiveness has fostered ties between academia and business; in contrast, MIT professors have risked losing tenure if they spent too much time on side projects.
Younger had a list of about eighty superstars, and he cultivated each of them methodically. He would send one luminary a technical article that might be relevant to his research; he would call another to mention that an old colleague was asking after him. In this way, Younger spun a web of loose connections that would form the basis for productive startups when the right opportunities beckoned.
The contrast between the coasts was crystallized in the story of Bob Metcalfe.22 A self-styled “Viking-American,” with grandparents from Oslo, Bergen, Leeds, and Dublin, Metcalfe sported bushy strawberry-blond hair and wing tip loafers and called himself “a right-wing hippie.”23 After studies at MIT and Harvard, he
Fidelity was trying to manage the intrinsic riskiness of startups by unleashing the lawyers. It did not want to recognize that startups can fail, in which case board rights and ratchets make no difference.
All in all, Northern California’s tech firms added more than sixty-five thousand net new jobs during the 1980s, more than triple the number created around Boston.
This led to further work in computational mathematics at Stanford; she had ascended from college backwater to academic pinnacle with remarkable speed, and she was the only woman in her Stanford program. Among her fellow students was Len Bosack, who stood out because he washed. “Nerd culture at Stanford was pretty extreme,” Lerner recalled.52 Len “actually knew how to bathe and eat with silverware.”53 The two embarked on a fiber-optic-speed romance.54 In 1980 they married.
Lerner, for her part, was off-putting to venture capitalists for different reasons. Whether because of her nature, her disjointed childhood, or the prejudice visited upon a woman in an almost exclusively male field, she came across as scarily abrasive.
A new chief executive took it upon himself to veto a sale of routers to a lab with military ties, explaining that if Cisco’s gear malfunctioned, it might trigger World War III, which was more responsibility than he could handle.
Bass judged that the personality issue outweighed the excellence of the technology. He doubted whether Bosack was investable.65 Valentine listened to Bass and reached the opposite conclusion.
Still, with the proceeds of his early windfalls, which included Compaq and Sun Microsystems as well as Lotus, Doerr bought a fine house in the Pacific Heights neighborhood of San Francisco and then bought a second house because it obstructed the view from the first one. The offending building was shortened, shorn of an obtrusive balcony, and turned into a guesthouse.
in July 1990 a young Tennessee senator named Al Gore laid out a public-sector vision for an “information superhighway.” Rather than operating on existing telephone lines, as the internet did, Gore’s superhighway envisioned brand-new fiber-optic pipes that would turn household TVs into interactive terminals.
“I can out-solder any person in this company,” Squarzini persisted. The candidate was ready to connect electrical wires with a hot iron to establish his credentials. Now Adams was impressed. “I couldn’t solder worth a damn anymore,” he said later. “So we hired him.”54
Son was an extreme example of a self-made man. His family was part of Japan’s marginalized Korean minority, and his childhood home was a squatter’s shack near a railroad that he shared with six siblings.
Yang said he was flattered but didn’t need the capital.24 “Jerry, everyone needs $100 million,” Son retorted.
Son turned to one of his lieutenants. “Write those names down,” he commanded. Then he turned back to Moritz and the founders. “If I don’t invest in Yahoo, I’ll invest in Excite and I’ll kill you,” he informed them.
There would be only one victor in the race to be the go-to internet guide, so the investor who could write a $100 million check could choose who won the competition. Like a digital Don Corleone, Son had made Moritz an offer that he could not refuse. Moritz later resolved never to be in this position again.26 Asking Son to excuse them, the Yahoo team went off to speak privately among themselves.
No Silicon Valley veteran would turn against a startup in which he had already invested: venture capital was a repeat game, and in order to earn trust, you had to honor your relationships. But Son was an interloper, ignorant of the unwritten rules. Silicon Valley convention was not going to constrain him.27
By one reckoning, Son expanded his personal fortune by $15 billion between 1996 and 2000.
software engineer named Pierre Omidyar. Born in Paris of Iranian parents,
A few months later, Amazon’s founder, Jeff Bezos, visited the Bay Area for a camping trip and met Brin and Page at Shriram’s house. After that, he wanted in.
By the end of 1998, Brin and Page had raised a bit over $1 million from the four angels—more than Yahoo had raised from Sequoia.13 But they had done so without speaking with a venture capitalist, without giving away more than a tenth of their equity, and without signing up for the performance targets and oversight on which venture capitalists insisted.
booming. In 1998 venture capitalists raised the record sum of $30 billion, triple the commitments they received in 1995, the year that Son met Yahoo. In 1999, the boom turned wild: venture partnerships filled their war chests with $56 billion.15 The number of venture partnerships in the United States hit 750, up from 400 a decade earlier.
Because they are first and foremost networkers, it is costly for venture capitalists to even speak of a bubble. An investor who publicly questions a mania is spoiling the party for others.
