<nettime> The Best and Worst Valley Trends

["nettime's_roving_reporter" <nettime@bbs.thing.net>]

<http://www.upsidetoday.com/texis/mvm/opinion/story?id=3856a8340>

Valley Trends: The Best and Worst Valley Trends
by Mark Bronder
December 16, 1999

On one hand, I think Silicon Valley is the most exciting and creative
business community on Earth. There is no question that the Valley has
become the headquarters for the new economy. I expect the excitement
to continue for years, thanks to the Internet explosion that is
changing the Valley as we know it.

On the other hand, there are several trends that piss me off. Below, I
offer my very own list of the best and worst trends that I've observed
in Silicon Valley.

BAD TREND: "Me-too" companies.
With the Internet gold rush, there are often ten startups trying to do
the same thing, many of them funded by top venture capitalists and
angel investors who should know better. Despite all of the fawning
over venture capitalists in the media and all of the money they make,
most VCs are sheep, dude.

Just as an example, there are at least a dozen companies creating Web
sites to help customers select the best digital camera, computer, car,
or cell phone based upon the customer's needs. A noble pursuit, but
it's not clear that any one of these companies can survive as a
stand-alone success.

And how many search engines do we need? We had the first wave with
Yahoo, Lycos and Excite. There have to be more than 20 like those.
Then we got another wave of natural language-type plays with Ask
Jeeves, Northern Light, Direct Hit and Google. Now there is yet
another wave brewing, including companies like Octopus, which can be
best described as MyYahoo on steroids. In other words, highly
personalized search engine home pages. Can all of these companies be
successful in the long run? Of course not.

Then again, can you blame people for trying, given Yahoo's $90 billion
market cap or Ask Jeeves' $3.5 billion market cap? Also, the history
of high tech shows what can happen to the market leader who sits on
its laurels and watches the world go by. Think VisiCalc, Lotus 123,
WordPerfect, dBase, etc. Nobody can coast anymore. As Sun CEO Scott
McNealy says, "If you're looking for a strategy which will allow you
to knock off at 3 p.m. everyday to go golfing, you ain't going to find
it."

GOOD TREND: Sharing the wealth.
Ordinary schmucks like you and me can get rich in Silicon Valley if we
hook up with the right company. In most of the rest of the world, only
people at the very top get the big bucks while everybody else is a
wage slave watching the clock tick by until age 65. Thanks to stock
options, regular Joes and Janes right down to the lowest level in the
organization can get a taste of the good life and security; maybe even
retire while they still have a pulse. It's capitalism at its finest.

BAD TREND: Everyone wants a cut.
It used to be in Silicon Valley that accounting firms, law firms, and
even landlords would give startups a price break. The idea was to
establish a relationship with a startup early in its life cycle in
order to reap benefits as it matures.

That table has turned in a hurry, however, with the flurry of Internet
startups. Now accounting firms, law firms, and headhunters are out of
capacity, and office space is a scarce as a suit and tie in the
Valley. Today everyone, right down to the landlords, want warrants or
options over and above their now fully priced services. Note to
entrepreneurs: Screw 'em! Don't give in to this scandalous piracy.
Seek out those lawyers, accountants, headhunters, and landlords who
just want to get their normally usurious remuneration. Or, only give
them warrants in exchange for a proportional reduction in fees.

By the way, rents on the Peninsula now routinely exceed prime
Manhattan property. Rents on Sand Hill Road are the highest in the
nation at $9 per square foot per month. Do the math. Even a modest
office for a couple of professionals and an admin can cost $100K per
year.

GOOD TREND: Angel investors.
God bless 'em. Angels are older (usually), successful, wealthy former
entrepreneurs and executives who help younger (usually) entrepreneurs
realize their dreams. The angels do this by investing their own money
in startups at the earliest stages, and then helping guide those
startups towards success. It's a great apprenticeship model. In the
old economy, these angels would still be occupying top slots in big
corporations where they would be doing their damndest to maintain
their power base by suppressing the same up-and-comers they now help
along.

BAD TREND: Tech stocks are outrageously overheated.
This is not news to anyone reading this story. In defiance of all
historical stock market logic, price-to-earnings ratios (assuming
there is an "e") and now even price/sales ratios look like area codes.
Obscure companies still in diapers with minimal revenues and no
profits are commanding market caps higher than well-established and
profitable Fortune 500 corporations with household names. Though I've
benefited personally, I've got to say this is nuts.

Yes, the market has been tested, if not tempered, by several
corrections in the last couple of years. One could argue that the
market is so fluid right now that bad companies get flushed out
independently of mass corrections. But you and I both know that this
cannot last. How will it end? If this market crashes, I'm afraid the
ripple effect could be very ugly indeed.

Don't get me wrong. Regardless of what the market does, the new
economy will continue to happen. There is no stopping the Information
Age. For the most part, the Internet is still operating on dirt roads.
Imagine what will happened when broadband becomes commonplace.

GOOD TREND: Failure is not punished.
One of the great things about the Valley is that people are given
several chances to succeed. Joined a loser startup that folded? Hey,
we understand. At least you gave it your best shot. Here's an offer
for more dough and options.

BAD TREND: The public is in the venture capital business.
I worked for a top tier VC firm in the 1980s . Back then, a company
had to have revenues of at least $20 million per year, plus have been
profitable for a few quarters before it would be allowed to go public.
Today, companies are going public at billion-dollar valuations with as
little as one or two million in revenues. Forget profitability. All of
this puts the public in the high-risk venture capital business.

Believe me, most startups created in the last year or two, both public
and private, will eventually fail outright or get absorbed into other
companies at bargain basement valuations. A VC friend of mine says,
"It's not for us to reason why. We just feed the machine [i.e. the
stock market] what it wants." I'm sure he speaks for the fee-hungry
investment banking community as well.

GOOD TREND: People get real responsibility earlier in their careers.
I'm on the board of a startup with several very sharp, freshly minted
Stanford MBAs all around 30 years old. In years past, they would have
joined management consulting firms, investment banks, or big
corporations. In all of these jobs, they would have put in tedious
long hours pushing around columns on Excel spreadsheets or polishing
PowerPoint presentations. They would have endured an extended hazing
period without much real responsibility or impact, while waiting for
their chance at bat (though one can make a hell of lot of money at an
early age in investment banking, if one makes the cut).

Compare that to what's happened with my guys. They have genuine, broad
top management responsibilities in a real company of their own
creation at the time of their lives when they are at their peak in
terms of energy, willingness to put in the long hours and ability to
take risks. Believe me, I worked for a top-tier management consulting
firm when I was their age and this is a vast improvement both for them
and for the economy.

BAD TREND: Wacky business models.
I guess I'm tired of seeing business plans with 13 tiny sources of
revenue, or reverse auction pricing, or aggregated buying power. Spare
me. The emergence of the Internet does not mean that basic business
conventions have to be reinvented. As a consumer, I don't want to play
guessing games to get an airline ticket.

GOOD TREND: Size doesn't matter.
For most of the 20th century, the conventional wisdom has been that
bigger is better. It was held that large corporations, through
economies of scale and vertical integration, were the paragons of
efficiency. Anyone who has ever worked in a huge corporation knows the
fallacy of that. Big companies can be a nightmare of endless meetings,
group thinking and glacial progress.

Recent developments have changed minds regarding the "bigger is
better" myth. First, the Japanese showed how lean production, which
relies more heavily on outside designers and suppliers, beats
traditional mass production and vertical integration on cost,
time-to-market and quality. Second, Silicon Valley has shown that in
technology, size is a disadvantage. Lightweight virtual corporations
populated by highly motivated employees with meaningful stock options
can run rings around the behemoths. Today, it's more important to be
fast than big.

BAD TREND: Consumer-oriented companies run by techies.
Here's the situation. The venture money is in Silicon Valley, as is
the technical talent and the infrastructure. So, many of the
business-to-consumer Internet e-commerce companies based their
companies in the Bay Area. However, much of the consumer marketing
talent is in New York, Cincinnati, Chicago and Minneapolis.

One result is a plethora of bland company names such as (I made these
examples up) stuff4sale.com and mywheelweights.com. If these guys
operated in the traditional world, Chevron would be called MyGas, and
Safeway would be called Grocery Building.

VCs have begun recruiting consumer marketers from other parts of the
country. Unfortunately, some of these people hail from a different
planet. One recently transplanted executive doesn't know how to send a
fax. That's what secretaries are for, don't you know. And, this new
CEO also wants to write up position descriptions as part of bringing
some of that much needed big company structure to this little startup.
Talk about the blind leading the sighted. That's all Silicon Valley
needs: bureaucracy.

GOOD TREND: Computing is finally paying off.
We have low inflation, low unemployment, low interest rates, high
growth, budget surpluses, and a stock market that has been on fire for
several years. Think this is all the result of Bill Clinton's fine
leadership? Think again.

We're finally reaping the benefits of increased productivity due to
the computer revolution. And, the end is nowhere in sight. The economy
is getting reinvented right now. We have a chance, among other things,
to rip an entire tier out of what is already the most efficient
distribution system in the world.

Of course, inflation only appears low at a national level. One need
only look at burgeoning salaries and home prices in Silicon Valley to
realize that we're experiencing high inflation here.

BAD TREND: Too much IPO focus.
I've heard from several people out looking for a new job that Topic
One at most startups is the IPO. One company even pegged its IPO at a
particular date nine months from now, as if there is that much
certainty in a high-growth startup and a highly volatile stock market.
The IPO is a beginning, not an end. Anyway, between vesting, lockouts,
and trading windows, most employees won't enjoy the fruits of the IPO
for several quarters, if not years. The focus of a startup should be
on building the business. If the business is successful, the rewards
will take care of themselves.

GOOD TREND: The best people go to startups.
It used to be hard to attract people to startups. Salaries were low,
while risks and hours were high. Now I'm often truly knocked out by
the quality of people who rush to join a startup. Big companies must
be tearing their hair out trying to recruit and keep good employees.
How ya goin' to keep 'em down on the farm after they've seen Paris?

BAD TREND: People shortage.
If you're looking for a job right now, it's a seller's market. Anyone
with any kind of chops at all can snare multiple offers. Fact is, the
talent pool here is getting pretty shallow. If you live somewhere
other than the Bay Area and you've got something to offer the world of
high tech, pack your bags. Sure the cost of living is outrageous, but
this is the best gold rush you're ever going to see in this lifetime.

GOOD TREND: Every startup is a United Nations.
People from all over the world come to Silicon Valley to strike it
rich and to make a difference. One startup I visited has the home
country flags of its employees on the wall. I counted over a dozen
flags in a company with 40 employees. All of this internationalism
only reinforces the fact that Silicon Valley is a meritocracy. If you
have the right stuff, you can succeed.

GOOD TREND: Everybody is a businessman.
I spoke to a management consultant from Seattle recently. He said that
there is a fairly large drain of middle level talent from Microsoft.
Seems once people get $5 million to $10 million in the bank from their
stock options, they want to strike out on their own. The problem, he
said, is that these people are much more naïve about business than
their counterparts in Silicon Valley. Why? They've spent their entire
careers in Microsoft, sheltered from the real world and with no view
of the big chessboard.

I met another fellow who has worked as CFO at a couple of biotech
startups. He said that more than once at these startups, the board
recruited CEOs who had spent 20 years or more at large pharmaceutical
houses. Invariably, these pharmaceutical types were great at big
company skills such as running meetings or making presentations. But,
they were totally out to lunch when it came to corporate strategy,
marketing and financing.

I don't think there is any business community in the world as
sophisticated as Silicon Valley. Countless entrepreneurs I meet can
speak articulately about business models, capital structures,
technologies, manufacturing strategies... you name it. It's like
everyone has a MBA, whether they actually have one or not. (Note: A
friend of mine says that the best MBA course is watching "The
Godfather.")

BAD TREND: Too much money chasing too few deals.
Ever since I came to Silicon Valley 20 years ago, I've heard the
cliché that there is too much money chasing too few deals. I thought
it was unmitigated nonsense for years. However, now we have more than
$3 billion of new capital going into Bay Area startups every
quarter... and growing rapidly. That figure also probably ignores much
of the capital invested by angels. Could it be that we are finally
exceeding the need?

There are several billion-dollar VC funds now. They're writing $50
million checks in single rounds of financing. Heck, I remember when
$50 million represented an entire fund. A $100 million fund was called
a "megafund." All of this has led to a plethora of me-too deals. It's
also changed the VC industry from a cooperative, collegial little
business, into a cutthroat competitive contest where each deal becomes
an ugly feeding frenzy. Venture capitalists themselves are treated and
act like rock stars.

One of the worse results is that startups have become sloppy. Money is
thrown around in a way that would have made entrepreneurs gasp 10
years ago.

GOOD TREND: Capital is flowing to where it's needed.
On the other hand, there's plenty of capital available for the new
economy. Maybe it takes this kind of investment to pull this off.
After all, General Motors alone probably spends close to $3 billion
per quarter on engineering.

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