Monday, June 15, 2009

Investors and Entrepreneurs in Silicon Valley

Guest post by Enrico Beltramini.

Silicon Valley (SV) is known for technological innovation and business model. Examples of technological innovation are the browser (Netscape), the search engine (Google), and the social network (Facebook); examples of business model are the Reverse Market, the Disintermediation, and the Long Tail. Before a geographic place, SV is a space of experimentation, the collective project of a new grammar of business. It has been built slowly over a few generations, and found maturity in the second half of the Nineties. Along with technological innovation and business model, there is a third element which has marked the history of SV and influenced its evolution. This element is less known of the other two, but certainly it is equally determined to make SV be successful. This element is the relationship between investors and entrepreneurs.

In a strict sense, the investor is someone who invests in a company. In SV this definition translates into a high risk investment commitment. For this reason, SV became almost 50 years ago the home of a specific form of investment, and competence as well: Venture Capital (VC). History tells us that the first VC was Arthur Rock, a little boy more than twenty years old, a law degree just awarded, a single customer, and five friends wealthy. He put this together in half an hour and managed to collect 5 million and fund the spin-off of eight researchers from Shockley Semiconductor. Thus the Fairchild was born. Fairchild then generated dozens of other companies, eight of them were born from five founding companies: Amelco, Signetics, National Semiconductor, Advanced Micro Devices - AMD - and Intel. Intel and AMD wrote the next chapter in the history of SV.

Since then, whether in times of economic growth than in a recession, two times a week the members of one of hundreds of circles of investors in SV are seated around the table and attend the presentation of business plans from entrepreneurs in need of funds. Fifteen minutes per presentation, four and a half hours for fourteen presentations (including breaks). Journalists imagine fabled meeting rooms where investors build the fortune of the new big, big thing, i.e., start-up that literally invented a business based on a service or product radically new. This is probably true for venture capitalists like John Doerr, a partner of Kleiner Parkins (office at Sand Hill Road, the road of VC) which financed Amazon, Compaq, Google, Intuit, Netscape and Symantec (in strict alphabetical list). For the founders of start-up, receiving a few million dollars from VC as Benchmark Capital, which has built a reputation financing eBay, or Dick Kramlich of New enterprice Associates, or Glenn Muelle of Mayfield Fund, is how to obtain a degree from Stanford or MIT: a road to heaven made possible thanks to the credibility, success and reputation that are provided by these names. These people increase the valuation of the ventures where they invest just by their presence. For most entrepreneurs, however, meetings like these are simply a dream, since they are financed by less known VC, or not funded at all.

Together with the investor, at the heart of the ecosystem of SV there is the entrepreneur. A special type of entrepreneur. He or she is the one who promotes the attack of large corporations despite the presence in the Valley of big companies such as Apple, Cisco, Google, HP, Oracle, Sun Microsystems, Yahoo! (in strict alphabetical order). From the mission to the strategy, passing through managing people, promoting innovation, developing technology, everything in the start-ups seems to be built right in the sense of overturning the traditional approach of the large corporation which sees in the management of the company the key technology. Given this emphasis on managerial work and competence that large corporations have spread and that now pervades the entire community of business, the entrepreneur offers a different perspective. To be an entrepreneur in SV is an anthropological rather than institutional form of life. It is a vocation rather than a profession.

The balance of power in SV between investors and entrepreneurs has reversed only recently. Until the mid-Nineties, investors took a large share of the society in which they invested, and often the operational control. The role of the entrepreneur - once investors were in - was marginal. Entrepreneurs of the new economy reverses this system. They explained that investors do not understand how a company works, they do not have the passion to drive them, and above all have too short term plans. Investors have to finance companies, not to guide them. Thus the figure of the entrepreneur - investor, who retains control of his or her own company even when the investors finance it, was born. Today, establishing a new company does not require the huge funds of the past. As it is possible to start-up with a few hundred thousand dollars, the role of VC is less important than it was in the past.

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