Scott McNealy

One of the few computer company founders who has remained at the helm almost from the start, the Sun CEO was an outspoken proponent of the power of computer networks long before the Internet and the World Wide Web took off. Now, Sun's computers and its Java programming language have catapulted it into the top tier of computer makers, along with IBM, Hewlett-Packard, and Compaq Computer. McNealy's often caustic remarks, aimed at archrival Microsoft and at big government, have made him one of the computer industry's most visible figures.

BW: What do you think makes Silicon Valley special?

MCNEALY: I'm not going to try and say now what makes it special. I can only tell you what made it special 15 years ago. One was, you know, we had four founders at Sun, and we were all 27 -- and I had three years' business experience, which was more than the other three combined. And we were able to raise $4.5 million in venture capital the first year. We were able to open a checking account on our word. We were able to rent buildings without having to show ID. You know, and at 27, I looked young. We were able to get phone lines, and [law firm] Wilson Sonsini filled a huge boardroom table full of documents for us to sign on our $0.5 million of venture money, when we started.

BW: That's what you had right at the start?

MCNEALY: Right. And then we got another $4,000,000 later in the year. By the way, there was only $250,000 of venture money, and $250,000 was our loan guarantee. And Wilson Sonsoni was willing to invest a huge amount [of time]. Their word processor just changed a previous company for our name.

BW: But that's part of the idea, isn't it?

MCNEALY: Four 27-year-olds who, you know, have this prototype that is a card cage connected with wires to a monitor with no housing, with a CRT to be the keyboard, and a power supply, and all the components shooting sparks like a Fourth of July sparkler. And the only thing it can do is a bouncing ball demo. That's all we could do.

And you know with that we went out and got all this money, and we had to use a rent-a-shop-by-the-hour kind of place.

I give Steve Jobs credit for this. Especially back in the early '80s, there was absolutely no age discrimination. In fact, any discrimination. Steve really broke the age barrier for us in a big way.

BW: By being successful.

MCNEALY: By being successful. By saying you don't have to be proven to get money -- and the whole venture thing. So, all of a sudden now the venture capitalists can play the rest of the game, and do a diversified portfolio investment.

There was probably a lot of extra money around because of the Apple millionaires and the Hewlett-Packard people and all the rest of it.

BW: The chip companies...

MCNEALY: The chip companies. And you're all putting money back into Sand Hill [Road, home of venture capital firms], which was then coming back out to us. And it would bid up the price of land. Which made a whole bunch of landlords like John Arriaga and Carl Berg rich. Berg put a lot of venture money into West Coast Ventures. It was all of the money from land accumulation, along with Hewlett-Packard and Apple, and a few other things. They got enough money going that they started funding all of this.

You add in the universities, like Berkeley and Stanford, and San Jose State, Santa Clara, and you've got some really great institutions. And, you know, most kids are not like me, who came out from the Midwest and graduated from Stanford and moved to Chicago. Most of them pass the IQ test and stay.

So you've got a lot of young folks with a ton of energy and over-hormoned and ready to go, and no family obligations. Everything that you need to go do a startup. It's really hard to do a startup with kids at home, I mean it's just very, very difficult.

BW: So then youth makes a really big difference?

MCNEALY: Oh yes. Youth makes a difference. You had youth, schools, weather, land appreciation -- you know, a few lucky startups that go well -- you've got the Valley, which has a geographic forcing function.

BW: What do you mean? Why is that so important?

MCNEALY: The valley forces you together. I mean there's no way to sprawl here.

BW: That explains why L.A. didn't take off as a technology center.

MCNEALY: Right. Geography, I think plays it along, because having to drive over -- it's like, why is Santa Cruz Operation [located over the hills in Scotts Valley] not going to make it? Geography. They're not in the Valley. Have you ever tried to drive up Highway 17? It's a disaster, right? So, that's a geographic barrier.

Another thing we have in the geography thing here in Silicon Valley is proximity to the Pacific Rim. DEC, IBM, Wang, and DG [Data General], and others are kicking our butts in Europe. Who cares? I'd rather be kicking butt in Singapore and Malaysia and China and Taiwan and Hong Kong, and all those others. And it's much easier -- it's brutal to go to Europe from here. Japan, I leave Saturday, arrive Sunday, and I'm fine Monday. And I fly home Friday night, and I've got all day Friday to catch up, and I've got the weekend.

And now, on the West Coast, you've got Intel, Microsoft, Sun, Apple, SGI [Silicon Graphics Inc.], Hewlett-Packard, Seagate, Sand Hill Road, The Java Fund, Java, Windows... I mean you got all the stuff that matters. SPARC and Solaris, and Unix and -- I mean, everything that matters out in the world today is out here on the West Coast.

BW: Why didn't Boston take off?

MCNEALY: There's no geography there forcing everybody together, so there's people outside the Valley, and inside the Valley, you've got people down in Cambridge, you've got people downtown. Boston is spread out.

BW: Is the valley, 10 to 15 years later now, significantly different from when you started?

MCNEALY: I think it's kind of tough to go out and out-Cisco Cisco, or out-Sun Sun, in the equivalent business. At this point, now, I think maybe we've settled down on the original equipment manufacturing side. But certainly in the peripheral accessory technologies and the software space, there's still a lot of energy.

I think a lot more of the investing today is, "Let's get a hit and make money," like a five-person rock band. You know, no overhead, just five in a garage, put it on the Net, and collect royalties. And then, kind of -- not build a business -- but build a cash cow. Or you build something to get by.

It's very hard. Even Steve [Jobs] couldn't do it, and Steve's the best entrepreneur I know. He tried it with NeXT and that was 10 years ago, and he couldn't do it. If the window had already come down on new startups, 1982 was the last chance to start a company in the equivalent business -- name one since then. And even the ones that did start, Compaq, SGI, and Sun in 1982, are the last three to make it.

BW: It seems like in some ways, at least when you look at software, it looks easier than ever to start something.

MCNEALY: Yes. Because of the Internet. You know, in the old days, the publishers were in charge and the authors were sitting in the back.

Or the authors created the content, and the people who made all the money were the publishers -- who you worked for, who used to put you in a little cubicle. Because they had the pulp, they had the delivery trucks, they had the big huge printing presses. And they had the distribution mechanism.

Now anybody can write a great article and put it on the Web. Or they can sell advertising or subscriptions. Or they can just write a good software application and put it out on the Net, like Mark Andreessen did, or like we did, with zero publishing cost.

So, in fact, that's a little bit of the problem for the venture community. Their value was being able to fund, they didn't make any money on Microsoft. Microsoft didn't need any money. We needed money, because we're in a cash-intensive business. We had to give away half the company in the first year to the "vulture" capitalists. It was the only answer for a cash-intensive business. But, you know, I'm not in the league of [Bill] Gates, and [Larry] Ellison, and those folks.

BW: There's been the rise of Netscape and all these other software companies on the Net. Obviously, the Net has allowed them to do that, but, at the same time, it does seem that the infrastructure here is kind of a well-oiled machine that can create these companies.

MCNEALY: The thing is that you don't hear about the ones who don't live. You don't hear about them at all. Is a startup company a risk? You splat a startup into the wall in the first three years, it's like a bug on a windshield. But if I were to splat Sun Microsystems against the wall, you know what it would be like?

Now is when it's risky. After you've gotten successful is when it's risky. There are thousands of startups going belly up every day, you just never hear about it. And a lot of them are so close -- they'll never know how close they were.

BW: Really?

MCNEALY: We never knew how close we were -- you'll never believe how close we were to going bankrupt a couple of times. It's just luck of the draw.

BW: Do you think there's a little bit too much frenzy around the Internet startups these days? Is there too much investment going in? Is there a danger of the same down cycle we saw with chips in the mid-'70s, and PCs and peripherals in the '80s?

MCNEALY: No. I don't think so. At least, I haven't seen it. I've invested in a bunch of venture funds. There's certainly a lot of them. The worst ones have done fabulously. It only takes one win, and the whole thing gets paid back by one win.

BW: And you don't see a danger of overinvestment?

MCNEALY: I think the only danger is an economic and a social perspective that doesn't support it failure--or covet it.

BW: You don't mean just allow for it?

MCNEALY: You know all the legislation that tried to eliminate plant closings, tries to give unemployment insurance, tries to prevent firing -- all of those things that don't allow for failure. It's like skiing and never falling down, right? The whole standard of living fails. We've proven it so many times.

So I think this is just a market economy running like it ought to run, with no government intervention, no government sponsorship. This is just the market economy at work.

BW: Somebody else was saying that in some ways, Silicon Valley is more of a purely capitalistic place than Wall Street.

MCNEALY: This is capitalism. That [finance] is cutting the pie up and taking a piece for yourself. Wall Street is legislated taxation -- it's legislated private taxation. That's all it is. I can't do a merger without a--what's it called--a "due diligence fairness opinion."

It's like lawyers, I mean, I put lawyers and bankers in the same boat. They don't create the pie -- just as the lawmakers have created an environment whereby they can just siphon off. Here, there are people working all night long, inventing, creating, building, manufacturing, developing.... It's just a bundle of creativity.

BW: Is there anything Silicon Valley needs to do next to maintain this vibrancy?

MCNEALY: It's got to keep the government out. We could get shamed into not allowing failure. We could get shamed into legislating. You know that big love-in they had, where was it, in Philadelphia where the government basically admitted that their big grand Great Society experiment hadn't worked -- that the one thing that had worked was business. They wanted to legislate tax breaks for socially responsible companies. And you know these socially responsible funds have all given them a far lower return than the "socially irresponsible." I think we need to keep away -- let the invisible hand work. It works way better.

BW: You think the split between the folks that work in this economy and benefit from it, and those who are off in the bottom half, is widening?

MCNEALY: I don't look at it widening. I think you've got to look at averages, I think you've got to look at the bottom rung, and I think you have to look at the growth rates. I think all of those, the averages, the bottom rung, and the growth rates are all moving in very good and positive directions around here.

I've been to China, and I've been to Moscow, and, let me tell you, we don't know what a bottom rung is. I've been to Bogota, and Caracas, and I've been to Brazil. There's a lot of great people here. And, by the way, they're going to do pretty great things with their wealth. People aren't spending money crazy out here.

BW: Housing costs have gotten to be a particular problem here. Is housing an impediment to Sun's growth here?

MCNEALY: Well, you know, we're a global company and we have engineering operations here, Colorado, Boston... Ireland, Scotland, Japan. I mean we're all over. We do manufacturing here and in Scotland, and we use partners all around the world. So for us, we're not just limited to Silicon Valley.

But, yes, it's a problem. But if we were trying to grow all 20,000 people here in the Valley that would be a problem. We're growing very fast outside the Valley too. So, I think we can handle a really really bright person who doesn't want to come to the Valley. We don't require them to live in Silicon Valley.

We partner very well with other companies too. Java's a part of that -- we'll take technology invented by anybody from anywhere ... and license it back out to everybody else. Windows has everybody from Redmond who's good adding value. We have everybody from the planet who's good adding value. We don't have to have them all here.

BW: Has it ever been a problem at all for talent, especially management talent or engineering talent?

MCNEALY: Our only problem is that there's so much venture money here. There must be several dozen Silicon Valley companies now who are West Coast companies who have ex-Sun CEOs now. Like [Bill] Larson [CEO of McAfee Associates] and [Kim] Polese [CEO of Marimba Inc.].... I could come up with a couple dozen right off the top of my head. They're doing everything from GolfWeb, to Autodesk, to -- you name it.

BW: Is the lure of venture money a problem?

MCNEALY: Yes. But I guess I'd rather have them come from Sun than from somewhere else.

BW: Like Redmond.

MCNEALY: We know them well. We work well with them. They work well with them. They understand the vision. They understand the strategy. And just about every one of them is helping in some way. They're helping more directly by being on board, but you know we need partners too. It makes them pretty easy to recruit.

We hired all of 425 kids right out of school this last twelve months. And they're all coming on board, and you know why? It's a great thing to have on your resume. And they're going to work their butts off here to prove themselves, to learn what they can, and to add value. And a lot of them will stay, and a lot of them will go.

BW: But that's not a big problem?

MCNEALY: Possibly. I look at it as I was 27 -- I was 29 when I was CEO here. I didn't have the experience. You know there's never been a generation that had the experience when they took over. You've just got to go learn by yourself, and that's a natural and good process. That's just the way it is, but that's okay. There's none of us here that are irreplaceable. There are 10 people who could take over from me inside this company.

BW: Do you think this current boom is sustainable?

MCNEALY: We've been kind of oblivious to all of that for 15 years. I don't really know. I mean, we've grown every year, and made money every year, in 15 straight years, which is kind of an unusual record, I guess. There's only a few companies that can say that, maybe us and Microsoft, who else could say that?

But you know not many $10 billion companies got to $10 billion without ever losing money, so this is the wrong company to ask that question to.

I personally like it when there's a downturn. It's easier to get good people, it's easier to get cheap prices on the components. It's easier to get facilities, it's easier to get the lawyers' and the bankers' time -- everything's easier when it's not going well.

BW: Why are there no independent PC makers in the Valley?

MCNEALY: Because they're not in the product business. This is a product valley. We're talking the farmers and the food manufacturers and managers. These are people who are creating products, not reselling them. So either you work for Intel or you're competing against them. Either you work for Microsoft or you're competing against them. You can go anywhere -- to be a distributor you ought to be geographically dispersed. Hewlett-Packard wasn't a reseller until recently, and now they've just kind of caved to the darkside [by moving to Microsoft's Windows NT and Intel's chips].

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