Joseph Costello

Joseph Costello is king-of-the-hill in the electronic design automation (EDA) industry, which makes geeky software tools used by engineers to design microchips and computers. Since merging with another start-up to create Cadence Design Systems Inc. in 1988, the company has grown into EDAs' largest company at $742 million in 1996 revenues, mostly through a barrage of bold acquisitions. While hyper-competitive, 43-year-old Costello is also known for his amiable, boyish ways -- unless he's talking about about intellectual property. For more than a year, Costello's been on a legal crusade against former staffers now at Avant! Corp, who were indicted earlier this year on charges that they built their company on stolen Cadence code. As a result, Costello has of late been calling attention to what he sees as dangerously loose business ethics in Silicon Valley. We spoke with him from his office in San Jose.

BW: Give us a little bit of your history. When did you first come here and what attracted you to Silicon Valley?

COSTELLO: I'm an accidental immigrant to Silicon Valley. I had a girlfriend at the time who was going to Hastings Law School [in San Francisco] and I'd been going to Yale. But she couldn't get into Yale, but I could get into Berkeley. So I ended up in this area and then never left. That was in 1975.

BW: Did you have an interest in high tech at that point?

COSTELLO: I was getting a PhD in physics -- and "high tech" is really low tech to a physicist. So I wanted to be a theoretical physicist. But at the time, [SIlicon Valley] was a bad place to go for physics...If you really wanted to do theoretical physics, you got told what to do and it was boring stuff. So I ended up forced into experimental physics, which I knew nothing about. But then I had another one of those "accidents." My father was the head of purchasing for Delco Electronics and would make visits out here because they were buying a lot of semiconductor products. He asked me one day to come pick him up, and I said, sure. Then he called to say 'I'm delayed. I have to do this dinner. Why don't you just come to the dinner and then we'll take off from there.'

So I went to the dinner, and who was at the dinner [but] Charlie Sporck and Floyd Kvamme and Jerry Crowley, all the guys from National Semiconductor. I knew very little about Silicon Valley, but I ended up getting a summer job. I figured I needed to learn about electronics, and figured there was no better way than actually working at it. I ended up staying almost two years at National before I went back to keep working on my PhD.

[Later, while back at school,] I went out on a date with this girl and she asked me what I did. And so for some reason I explained a little bit [about National] and about the physics stuff I was working on. She kind of looked at me. We were on a beach, and I remember walking back to the car and she says, 'you know, I really don't understand very much about what you said, but I'll tell you one thing: whatever it was that you did at that semiconductor place, you sure liked it a hell of a lot more than what you're doing now.' And I remember thinking, 'I am going to get a PhD in physics. I'm destined to be a doctorate in physics and become a professor of physics.' What did she mean I liked it better? I was offended.

BW: When did you get a sense that you were at a place in time where you could build a big company and have the chance to be the kind of entrepreneur that you are?

COSTELLO: I never ever thought that way. I decided to leave my PhD program before I finished -- because what she said was true. I wasn't having any fun. It took me a while to figure it out, like about a year, but she was really right. So after a lot of stress, I decided to leave, and the thing that got me hooked [was the idea of] becoming a manager. The work environment when getting a PhD was pretty miserable. It really wasn't a very nice place to work. And I wanted to manage something.

My first thing was to start a company doing energy conservation. It turned out it didn't work because Reagan got elected and he and Carter disagreed about energy conservation. So when I got a call from the guy I'd worked for at National, I ended up [going back to] National with the express idea of becoming a manager so I could build a group that did things differently. That was as grandiose as it got at that time. I had thought about starting a company, but not to build a big company. It was more about building an environment that [people] would like to work in.

BW: Did you have the sense that there was something about Silicon Valley that made that possible? Could you have done this somewhere else?

COSTELLO: I think it's way harder -- I mean way, way harder. The great thing here is that you get to do your own thing, with people who are very aggressive and entrepreneurial and can make things happen. It was, and still is today in many ways, very wide open in terms of the possibilities. There are not a lot of limits.

BW: Do you think Silicon Valley's [investment] engine is working as well now as it used to? From the outside, it looks like it's working better because there's more companies being created all the time, but should all these companies be getting funding? What do you think?

COSTELLO: Yes. I think the engine is working extremely well. There's a critical mass phenomenon here in Silicon Valley. It's large enough and there's enough money, people, infrastructure, and brand to attract the people and financial resources to make things happen.

There's just so much that goes on day-to-day. It's a great incubator, with all the mixing of people and ideas and talents. An idea for a new company might come just from a casual conversation. Even your kids talk. There's all these intersections that happen in Silicon Valley that makes new things happen. And it's definitely a place where people think that anything is possible.

BW: Can you think of stories or anecdotes that show the power of this?

COSTELLO: I left National to start a little semiconductor company. But I left after 9 months or a year to go to SDA, which is the forerunner of Cadence. So I'm at National and my boss is Jim Solomon, who starts SDA with money from National Semiconductor and a few other industrial sponsors. I leave to go start this other company which eventually was purchased by the current president of ESS. But when I left...I had a friend who'd left Xerox PARC, Jim Mitchell, and the reason I'd gotten introduced to him is that one of my best friends from college was a computer science guy who came out to Stanford who got his master's and I got introduced to all those PARC guys.

He wanted me to go join him in his new venture with Olivetti, that was doing the advance new computer phone and calls me up and there's this opportunity doing this stuff here. Jim Mitchell ends up at Sun. I think he's the head of their operating system development or something like that. I mean there's connections all over the place. They just make things happen.

BW: You're not a Stanford person, are you?

COSTELLO: No, Berkeley man.

BW: We hear a lot about Stanford, but talk a little bit about Berkeley and the role that university plays in Silicon Valley.

COSTELLO: Well, it's clearly a better school. [Laughs] But Berkeley is the physics school in the Bay area compared to Stanford. I'm sure the Stanford guys might object, but in general, Berkeley has the stronger reputation. And it has been the preeminent school worldwide in design automation technology. That started with the original development tool -- you could call it the "father of all EDA tools" -- called Spice, which allowed people to simulate transistors on computers. That was in the early '70s.

BW: Does Berkeley's influence extend to other software disciplines?

COSTELLO: UNIX came from there. So Sun was really a hybrid [of Stanford and Berkeley]. That's another great example of a Silicon Valley story. I met the Sun guys when I was at National Semiconductor. We were trying to do speech synthesis and recognition. We had VAXes, which were like mainframes, and we wanted more accessible computing power. So we started scouting around for workstations, and, God, there must've been 10 companies that were doing something in that space. Apollo Computer was the big one back on the East Coast. And I remember meeting with Scott McNealy and Vinod Khosla and Andy Bechtelshein in this little grungy warehouse-like place. I can't even remember where it was.

BW: What's the social life like back then? Did you all hang together as well or no?

COSTELLO: No, Silicon Valley's funny that way, I'd say. People tended to cluster. The most interesting social life was actually around Xerox PARC. But again, people clustered. But there is an alumni effect. Once you've been at a place and you know the people, then groups do tend to get together, and you get a lot of cross fertilization.

BW: I know you have worries about threats to Silicon Valley's [continued success].

COSTELLO: Well, there's a few things. I do think there are problems in Silicon Valley today. I think the greed ethic of Silicon Valley has gone way too far. There's nothing wrong [with getting rich]; more power to people who want to create something and make a lot of money in the process. But it can get carried too far. It can become so much how people get driven, that it completely warps people's values and principles and ethics.

BW: Are you suggesting that there's a sort of [empty economy underlying the current Silicon Valley prosperity], that all this wealth isn't real. Or are you just talking about the price people pay for success?

COSTELLO: It's just that if greed becomes the be-all-end-all, if getting the

huge amounts of dollars and the big IPO and having more stacks of dollars than the next guy is what drives everything, it could start driving out all other thoughts. All things become justified. The end -- money -- justifies the means. And if it gets carried too far, that's not good. I think you need to have a stronger principle-based environment than that. The whole goal is to create things of great value, and when you do that you get to share in the wealth. If the whole goal becomes the wealth, it's a pretty hollow and I think can become easily manipulatable end goal.

BW: How so? What do you mean manipulatable?

COSTELLO: You can get people who can prey on those kind of negative instincts. This Valley wasn't created by people who are just greedy. It wasn't just a bunch of people who said, wow, let's make a Valley where we can make a ton of money. That wasn't the idea. People thinking, yeah, we can take this great technology and turn it into things that are really, really interesting and valuable to society. Making a difference and making something valuable took precedence. And there were rules and principles about it. But I fear we are moving way too far from that. You read quotes all the time from people who talk about how the end goal is to make the most valuable stock, or create this many millionaires or this and that. That's a pretty hollow end.

We've got to have people who set some principles and rules and ethical guidelines. I think you need to have principle-based societies or you end up with chaos and anarchy in the end.

BW: Have you tried to call industry leaders on this, and what kind of response have you gotten?

COSTELLO: I've talked to a number of people about it. It's interesting. I think it resonates with some people, who think it's very scary. I told you about Don Lucas, our chairman, and he's looking at it from a venture capital point of view. He looks at the people coming into that business today, and it worries him. I talked to Gordon Moore about it. And when he reflected on it, he said 'yeah, we don't have the patriarchs of the industry or matriarchs for that point of view.' There aren't these leaders who are setting the tone. And maybe we are getting carried away on the side of greed..."

Now I will tell you, a lot of people say 'I'd love to worry about that but I gotta get a product out the door. Who has time for principles, right?' There is that intensity in Silicon Valley, but I think we can get carried with it. It's such a dog-eat-dog business, that we can use that to justify almost anything you want. Before I moved to Silicon Valley -- I commuted from Berkeley -- I remember thinking there was a lot of Brownian motion down there. That's a physics term [that describes what happens when there's] a lot of random energy in the air, like molecules just bopping all around. A lot of heat, but no motion is created from that. They don't get anywhere. They're just bashing around, and I think we can tend to do that too much. In Silicon Valley. There's such an ethic of just 'move for the sake of moving.'

BW: Other than ethics, are there other problems you see?

Costello: I look at how much more legal issues have come into play in high technology. Ten or twenty years ago, no one talked about lawyers or legal issues or filed lawsuits back and forth. Today, it's absolutely commonplace. It happens all the time, day in, day out, and people are anesthetized to it. Which is the problem we had around the Avanti case. It's just another one of those lawsuits. And it's interesting to me, because it's taking up more and more and more of people's time and draining a lot of resources, and it isn't getting us anywhere. It's not like we're making great strides or coming up with new doctrines or ways of thinking about these issues....We're just using a judicial system that was never intended to deal with high technology to try to deal with it all.

BW: Well, what do you think the solution should be?

COSTELLO: I think we have to inent something new. How many times do I hear executives at other companies or in our company say, 'I've got to check with the lawyers. I've got to protect ourselves legally. Got to see what our rights are legally.' And we act as if we are the victims or servants of this system. Well, [there are two] problems with our current judicial system when it comes to technology. Number one, it doesn't have depth of knowledge or field. And the second thing is the time scale is all off. So not only are the decisions rendered by the system...irrelevant because of lack of understanding, but they're irrelevant because the time scale is all wrong. Decisions aren't made in the time scale appropriate to the business at hand.

BW: Do you see a model in other industries?

COSTELLO: People have told me about the chemical industry, but I have not gone to study it yet. [But our] industry leaders have to get together and say enough of this. Let's actually come up with a way of dealing with these in a much more proactive as opposed to reactive way.

As an example of the breakdown of the system, our whole patent situation in high technology is absurd. Most of the patents filed today in high technology are utter crap. Real crap.

BW: In what regard? What do you mean?

COSTELLO: No real substantive innovation. The real question is: 'Can I get a patent issued on this?' And the way people wage patent wars is by the weight of their patent portfolio.

BW: Is Cadence guilty of that, too?

COSTELLO: You know, no, but we've been encouraged many, many, many times to get into that game. 'What's your patent portfolio? Oh, you've got to start building it. Start filing patents on this, that, or the other thing. You've got to get a big heavy portfolio.' Now that's absurd. It's like the nuclear deterrence [policies] of the Cold War. Just continue to build up huge stockpiles of nuclear weapons on each side. No matter that it's actually enough to obliterate the earth many times over. We're doing the same thing. But no one's stopping to take a look and say is this the right path? We're just blindly charging forward here, and building more patents and spending more money on lawyers and complaining all the way. Absolutely complaining the whole way.

BW: Maybe it's related to the fact that there so much wealth is being created, and there doesn't seem to be another part of the world that is threatening to take it away. I mean, there's no other place that seems to be coming up with a better model. So maybe Silicon Valley thinks it can afford this wastage.

COSTELLO: Yeah, but if you're any kind of student of history, that kind of arrogance always seems to be the downfall [of societies]. If it ain't broke, don't fix it. The truth is, you gotta be careful because these things do break if you overextend them, and I think we're in a situation here where we have some symptoms of stuff that's not working right.

I'm not talking about building some huge bureaucracy to [deal with intellectual property issues]. But let's spend some time thinking about this instead of just bitching and moaning and paying huge fees to wage meaningless battles. Let's try to map out something differently.

Now there's a huge wave of problems coming around intellectual property. A huge wave. We've only seen the tip of the iceberg -- the DEC/Intel lawsuit being the latest example. And our legal system isn't ready to handle it, and there is a possibility that other people outside the United States could be clever and come up with some new rules and ways of handling this.

BW: Talk about that. I understand you've thought about whether other places in the world might be a better place to run a company like Cadence?

COSTELLO: Yeah, it's possible. I'll give you a couple of examples [of the kind of thing that could make that happen]. Within the past year, there was an immigration law that was going to be passed in the United States [that sought to] limit the numbers of people that could [get a certain class of visa to come to this country]. It almost got through. This was the ultimate cut off your nose to spite your face law. The whole idea was protect America's jobs. Holy Toledo. America was built on waves of immigration. We've been built on the spirit and energy of those kinds of people. And the latest wave is in technology. So it's not the guys building the railroads or farming the Mid-West. But there are people who are flocking to the U.S. because we are the high tech mecca. The greatest minds from around the world want to be here. And we're talking about shutting it off. How stupid can you get?

If we were told we could not do it -- and I can't remember the exact statistics, but I think our company at the time we had 600 people out of about 3,000 on these kinds of visas -- it would severely limit our company's creativity and productivity. [If that law had passed], in six months I'd be set up and running again in another part of the world. I don't know where I pick, but the truth is today you can run in other parts of the world. In this wired world, it's getting to be very easy to operate from multiple points. So if things aren't right here, go someplace else.

BW: What's your expectation? Do you think Silicon Valley is going to hold the degree of preeminence it's had?

COSTELLO: There are some issues and problems. [For example], it is not the most conducive place for a young person to come and make their way. In fact, the bottomline is if they don't have a big hit in terms of getting stock in a company that goes IPO, they're not going to have the house and all the things that they're looking for...The prices and things are absurd here compared to other places. We have to watch out that we don't overdo that.

BW: What kind of things do you have to do to manage that problem? Anything interesting Cadence is doing to help people come here?

COSTELLO: The thing is, the system feeds upon itself. In the old days when people went to a start-up company, it was risky and you had to take a cut in pay. You made up for it because you got these stock options. Today with the flood of venture capital and this whole greed ethic, you can earn more money by going to a start-up. People's attitude is, if it doesn't work out, I'll just go back and work in one of these other companies.

BW: It sounds like you really think Silicon Valley is overheating, like there's a false economy [being constructed on companies that have no business being funded]?

COSTELLO: I think there is. But who am I to say false, right? It's false only in the sense that you have to wonder if its sustainable long-term. But it's real today. That's how much money is here today. Is it all sustainable? I don't know. Right now so many good things are lining up [with regard to the economy]. There's tons of venture capital, we're in an all-time bull market which makes it look like nothing could ever go wrong, and the world economies have been doing extremely well. But not everything stays lined up just right like that. Remember two years ago, people were saying the semiconductor industry is never going to have another downturn. I mean, smart people were standing up and saying 'never again. It's upward and to the right, no more glitches.' It was only six months later, of course, that we started another big glitch -- one of the worst glitches we've ever had."

BW: It seems like we're in another period of euphoria, no?

COSTELLO: I think there's a bit of that going on right now, and it'll probably get trimmed back. I say [let's learn [from some of the mistakes of the past], and try to do some of the right things to get ourselves on a more even keel going forward. It starts with a better set of principles and values. Yes, it's a hassle and costly and a pain now. But could it become the thing that kills the golden goose tomorrow? Silicon Valley does have something great today. It's a great magnet [for smart people]. It's got the brand name. And success breeds success in the sense that once you've got all these smart people in one place and you've got all this money, it's easy to create more of it. But let's not screw it up.

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