Special Report -- Silicon Valley -- How It Really Works
`WHAT MATTERS IS HOW SMART YOU ARE'
What makes the Valley go round? Good ideas, mostly--plus a unique, risk-taking ecosystem
They came from India, Pakistan, and the heartland of America, by way of Illinois, Boston, and North Carolina. The three men quit good academic jobs, left their homes, and packed up their cars for the long drive across the U.S. Their Conestoga wagons were a Mazda, a Toyota, and a Jeep. Their campfire stories were told over cellular phones as they barreled across the plains. Their dream was to build a high-tech company, and they believed to do that, they had to get to Silicon Valley. "We're coming, no matter what," Resve Saleh recalls telling a venture capitalist on the phone. "We have to be near Intel."
The trek paid off. In an office park five minutes up the road from Intel, the trio has launched Simplex Solutions, which makes software for simulating chip designs. Just two years after their cross-country pilgrimage, the company has raised $11 million and employs 55 people. Simplex' software already has won over such customers as Silicon Graphics Inc. and Hitachi Ltd. Now, Saleh and his partners are racing toward a new milestone: taking their company public within the next two years. Marvels the 40-year-old Saleh: "This has exceeded our wildest expectations."
PUMPING UP. Everyone else's, too. Silicon Valley. Rich in ideas. Richer in dollars. And all on the back of the biggest industrial revolution since the internal-combustion engine: computer technology. Some 20% of the world's 100 largest high-tech companies make their homes here. Zip 10 minutes down Highway 101, the main artery that hums through the Valley, and you pass powerhouse after powerhouse: Intel, Cisco Systems, 3Com, Sun Microsystems, Netscape Communications--those five alone boast combined revenues of $40 billion and a $257 billion market capitalization. More than the market value of General Motors, Ford, and Chrysler combined.
The region is intoxicated with such successes. In the past two years, the Internet craze and hot new startups pumped up an already vibrant economy into one busting at the seams. In 1996, on average, one Valley company went public every five days, adding 62 new millionaires every 24 hours. More than 50,000 new jobs were created, while wages grew five times the national average. Last year, the region led the U.S. in worker productivity and export growth. "This is an economic miracle taking place, right before our eyes," says Thomas M. Siebel, the founder of Siebel Systems Inc., a software maker that raised $33 million when it went public in June, 1996.
Such vitality has transformed Silicon Valley into the quintessence of the American Dream: Any good idea in a garage can turn into a gold mine. No pedigree required. What's more, a big chunk of the wealth that's being created is being distributed far beyond the corner offices, thanks to the Valley's stock-option culture where employees can buy shares in startups and giants alike at prices below market value--then cash in big when the stock takes off.
That has made this 50-mile-long corridor, reaching from San Jose to San Francisco, the ultimate destination for those drawn to the digital land rush. In 1995 and 1996, Saleh's company was just one of 900 startups that set up shop here. And the pace is only accelerating: In 1997's first quarter, 147 new hopefuls joined the ranks, according to Price Waterhouse. "It's an elixir that you breathe in the air as you come to this part of the world," says Christos M. Cotsakos, CEO of Palo Alto-based online brokerage E*Trade Group Inc., which went public last summer, raising $46 million. "I have never seen anything like this. This is Mecca."
Mecca maybe, but not heaven. The Valley has its dark side. For one, it's expensive to live here--the median price of a single-family home hit $319,000 in June, up 14% from a year ago and out of reach for 70% of the residents. Anyone caught on the clogged 101 knows that traffic delays are just one of the aggravations in the jam-packed Valley. And the reality is that few dreams are realized--only one in 10 startups hits it big, six limp along, and the rest are destined to implode, shattering dreams and swallowing hopes.
But that one that makes it--ah, that not only brings riches but the chance for an engineer or programmer to change the way people work and play. For all the talk of money in the Valley, there is just as much verbiage about "making a difference"--in how people get information, crunch it, use it, and entertain themselves with it. "I'm not in it for the wealth anymore," says Oracle Corp. CEO Lawrence J. Ellison, who's worth $8.4 billion. Why, then? "How much difference can one person make?" he asks. "All the difference in the world."
Making millions and making a difference is the Silicon Valley mantra. But the machinations behind that--the dissection of how that really works--is a complex study in amassing a deep talent pool, building infrastructure, and then overlaying it all with a can-do, break-the-rules culture. The contribution of Stanford University and the University of California at Berkeley, which have fed the maw for brainpower, cannot be underestimated. But that was just the first component in a complex formula that, so far, has not been repeated anywhere else in the world.
Perhaps the biggest factor in Silicon Valley's success is its sheer density. The region crosses 30 city lines, but it's basically a one-industry town crammed with some 7,000 electronics and software companies, and more in the making. Even the tech heavies from elsewhere think they need a presence here--Microsoft Corp. has sales reps in Foster City and programmers in Cupertino; Sony Corp. set up a research center in San Jose; and Taiwanese PC giant Acer Inc. built research and development, engineering, and manufacturing facilities in San Jose.
That creates a synergy with exponential effect. Executives rub shoulders at work, at the corner Starbucks, and on hiking trails. A breakfast at Palo Alto's trendy Il Fornaio or Woodside's down-to-earth Buck's quickly becomes a dealfest for a venture capitalist or a jam session for engineers on the latest advances in gigabit ethernet. "You end up seeing each other at parent-teacher nights," says Heidi Roizen, a former Apple exec. Adds Intel CEO Andrew S. Grove: "Proximity helps. People have worked with each other, competed against one another. We have such a rich ecosystem."
The result is nonstop cross-fertilization. Take Netmosphere Inc., an Internet Java software startup. Like so many Silicon Valley stories, it began with a chance meeting between an engineer and a marketer at a January, 1996, party in San Francisco. Eric Ly, now 28, had designed software for General Magic Inc.; Heather Rose, now 33, was the product manager who launched Shockwave animation software for Macromedia Corp. Both were looking for new challenges on the Net. Ly obtained $300,000 in private seed funding, and the San Mateo-based company has launched its first product: Net software for managing big projects. Now, Rose is looking for $3 million in venture capital.
This is where the Valley's impressive infrastructure comes into play. Over the years, the region has fine-tuned the task of transforming concepts into companies. About half the nation's 600 venture-capital firms are based in the Valley, according to the National Venture Capital Assn. And many of them have offices on Sand Hill Road in Menlo Park, smack dab in the center of the action. These players fork over the necessary cash and knowhow in hopes of 30% returns or a megahit.
They are essential to the Valley. Over the past four years, venture capitalists have plunged some $5.5 billion into Valley tech startups, 37% of all information-technology investments in the U.S., according to VentureOne Corp. And they're not alone. Hundreds of other supporting-cast members have been drawn to feed on the tech food chain, from lawyers who know the ins and outs of software and patents to suppliers of machine tools--all with ready expertise for a novice entrepreneur.
It's an instant company-making machine. With the touch of a button, boilerplate stock-option plans and prospectuses roll out of the word processors at the law firm of Wilson, Sonsini, Goodrich & Rosati in Palo Alto. The nation's largest human-resources outsourcing firm, TriNet Employer Group in San Leandro, can set up everything from payroll processing to workers' compensation insurance to a customized benefits plan overnight, says CEO Martin Babinec.
Even today, Sun Microsystems Inc. CEO Scott G. McNealy marvels at how fast the cogs whirl. In 1982, he and two other 27-year-olds with close to zip experience managed to raise $250,000 in venture capital on the whisper of an idea--making powerful workstations. "We were able to open a checking account on our word. We were able to rent buildings without showing ID. We were able to get phone lines, and Wilson Sonsini filled a huge boardroom table full of documents for us to sign," he says. "Actually, on their word processor, they just changed a previous name to our name."
But this is just half the formula. A big part of Silicon Valley's success comes down to something that cannot be quantified: the culture. This is one of the most unusual business environments on the planet, where the traditional ways of doing business have been turned on their ear. At the core of this is an all-things-are-possible attitude, an unerring belief that a new technology, an entrepreneur's vision of the digital future, is the absolute right one. And if it isn't, well, the next one will be.
It is Daredevil Business 101, where risk-taking is the norm and the penalty is not for failure but for not trying. This has created a wide swath of so-called repeaters, entrepreneurs who may start a company and crash but will try it again with the blessing and the bucks from venture backers. This is how the theory goes: Good ideas are the most precious commodity, and an entrepreneur who has them and stumbles comes away with enough lessons to get it right the next time.
Lucky for William G. Paseman, a former oil-rig worker from Houston who got an engineering degree from Massachusetts Institute of Technology and headed West. In 1986, he started Atherton Technology to make object-oriented programming tools for speeding up software development. For five years, he says, "we made every mistake we possibly could. You could have burned a BMW in the parking lot every day at our run rate." The company went bust.
But soon, Paseman had another idea. He discovered that companies doing business in Europe had trouble working with the varying electrical-emissions standards in different countries. He came up with a software program to help them navigate "the pain." Knock, knock--he went calling on his Atherton venture backers, including the Mayfield Fund. Once again, they took out their checkbooks to the tune of $2.9 million, backing Calico Technology Inc. Says Mayfield partner Yogen K. Dalal: "Failure is not a black dot in the Valley, it's a badge of merit."
IT'S THE IQ. The only thing more vital than taking a risk is having an idea. The push to come up with bigger, better, faster, and cheaper technology has thrown open the door to all comers. In the Valley, people rarely care what school you attended, your ethnic background, or your family pedigree. They want proof of IQ. And with the exception of the lack of women and African Americans heading companies, it works. "Silicon Valley is a meritocracy," says Steve Jobs, co-founder of Apple Computer Inc. "It doesn't matter what you wear. It doesn't matter how old you are. What matters is how smart you are."
That worked to the advantage of two entrepreneur-wannabes then at FirePower Systems. The pair went to see venture capitalist Steve Jurvetson at Draper Fisher Jurvetson. But the investor was unimpressed by their idea for database software for the Net. As they were packing up to leave, he asked: "Do you have any other ideas?" Sabeer Bhatia, one of the engineers, said they'd noodled over a scheme to offer free, advertising-supported E-mail over the Web. A week and a half later, the venture capitalists ponied up $300,000 (no business plan required), and Hotmail was born. Today, it claims some 4 million subscribers.
Such reinvention is the lifeblood of Silicon Valley. Throughout the decades, from the days when industry pioneers Charles Sporck and Ken Oshman and venture backers Arthur Rock and Mike Markkula were the Valley's movers and shakers, the Valley has constantly remade itself just in time for the Next Big Thing. When the computer industry went into a tailspin from 1984 to 1987 and high-tech employment plunged 11%, to a low of 191,900 jobs, the Valley emerged with desktop-publishing software and powerful workstations.
POWER BROKERS. And nowhere were techies quicker to latch on to the Big Kahuna--the commercialization of the Net. Now, the Valley, already in overdrive, has entered Internet time.
Kleiner Perkins Caufield & Byers partner L. John Doerr, one of the Valley's top power brokers, carries a pager, phone, personal digital assistant, or laptop wherever he goes--he can't risk missing an opportunity. John R. Koza, a consulting professor of computer science at Stanford, has a massively parallel computer in a spare room of his hilltop home so he can plumb the frontiers of programming at all hours. Who knows--maybe Koza, who made his fortune designing instant lottery programs, might hit it big again.
These days, companies are trying every trick imaginable to cut even minutes out of normal routines. Macromedia Inc., a multimedia software company, has installed a slide between floors to get engineers to their destinations fast. Internet startup Excite Inc. has stashed pink bicycles throughout its offices so workers can zip to one another's cubicles in their cavernous digs.
Now, Valley companies are even beginning to look like 24-hour planned communities. At Netscape, a Winnebago stocked with dentists shows up twice a week for workers who can't find time for checkups. At networking maker 3Com Corp., employees can get film developed at the company store and their car washed in the parking lot. And weary engineers at Net startup PointCast Inc. keep washers and dryers humming around the clock. "These startups," says Marc Andreessen, co-founder of Netscape, "demand virtually a Herculean effort from all their employees."
So far, they're getting it. Which is why Silicon Valley keeps spinning good ideas into gold.By Andy Reinhardt, with Joan O'C.Hamilton and Linda Himelstein in Silicon ValleyReturn to top