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Roger McNamee: The Valley Still Has an Edge


Roger B. McNamee has been a fixture in Silicon Valley's investment community for more than two decades. But McNamee isn't just any investor. He's also an entrepreneur. As co-founder of Integral Capital Partners in 1991, he pioneered a now common strategy that combines public-market investing with venture capital. He led another trend in 1999, when he co-founded Silver Lake Partners, a tech buyout fund. McNamee shared his views with Silicon Valley Senior Correspondent Linda Himelstein and Correspondent Jim Kerstetter.

Oracle CEO Larry Ellison says that Silicon Valley, as we know it, is dead. Do you agree?

I would not answer the question the same way Larry does for a whole bunch of reasons. First of all, Silicon Valley is the world's most efficient producer of innovation. And it has a set of resources and access to capital that are second to none on a global basis. In the downturn, it's gotten pounded. But I think it will emerge with at least as big an edge coming out as it did going in.

Why is the turnaround taking so long?

The biggest issue the Valley faces is that the excesses of the late '90s were so extreme that the process of working off excess capacity is taking longer than at any time in the past. And it's certainly not done yet.

Then do you agree with Ellison that the industry is going to shrink?

For a while, people will spend less than they did at the peak. But there's nothing wrong with that because what happened before was ridiculous. I don't see a future in which every tech company prospers. I see a world of intense competition in which the average company does relatively poorly. But innovative, successful companies will not only change the world, they will become very big, very profitable, and reward their investors in a way that you won't find anywhere else in the economy.

Do you think big companies will be responsible for the bulk of innovation in the future?

I just don't believe that. It is just a fact that smaller, more entrepreneurial environments beget more innovation than larger, bureaucratic ones. But I think this is an environment that favors established companies. You are going to have a period when it appears the innovation is coming from them, but it really has more to do with incumbency.

I think innovation will come from the Googles of the world and the SalesForce.coms that innovate. The venture environment will be challenging because there is too much money and because every good idea will be greeted by dozens of me-too imitators. The challenge will be to break through that.

What are the really good ideas right now?

One thing that is important is the proliferation of wireless technology, particularly in the world of data. What isn't known is what business model is going to work best there. Early experiments have been wonderful for the consumer but not very good for the carriers or the vendors of the equipment. But that will rectify itself. Also, I think there are going to be a lot of things around Web services, addressing both consumer and enterprise needs. I would say Google and SalesForce.com have cast a bright, shining light on Web services.

Do you believe tech's future is bright?

I would say the [soft economy creates] a very good investment environment. And we shouldn't lose touch with the fact that tech is now 8% to 9% of gross domestic product. It's virtually half of all private-sector domestic capital spending. The continued deflation of the prices of major computing systems is unbelievably powerful in our economy because we are a net buyer of that stuff. You look at things like DVDs or Apple's iPod. Even things like the Roomba intelligent vacuum cleaner. These things literally go from brand-new products to mass markets in two or three years. That would never have been possible a decade ago.

But does that deflation of prices mean the size of the overall tech industry shrinks?

If the applications of technology were static, it would. You've seen that occur in some categories, most notably with PCs. Where I differ from [Ellison] is having more confidence about the industry's ability to innovate. But to be clear, I think for the next two or three years, industry revenues could be flat to down. There are big pieces of this thing that represent inefficiency -- excess capacity that still needs to be eliminated. But that's a one-time event.

So what are you excited about?

Market leaders have an opportunity to gain enormous advantage in the current turmoil. Against this backdrop, I expect the venture industry to make a lot of investments over the next five years, and some of them are going to work out spectacularly. VCs are in the mode now of sowing a lot of seeds. And I don't know how many flowers are going to grow, but I know there are going to be some flowers.

Who will be the winners in the years ahead?

The power of market leadership is just enormous. Oracle is brilliantly positioned. Microsoft is brilliantly positioned. Cisco and Dell. But it's not a "small company vs. big company" thing. It's really about having customers who value the products you have sold them. The '90s were about investing in themes. The Internet was hot. PCs were not. The No. 3 guy in a hot industry was more interesting than the No. 1 guy in another industry. Big companies with lots of customers have advantages.

But those advantages disappear very rapidly if you're a follower and not a leader. Think about companies that compete with Cisco. Look at Lucent and Nortel, which are being forced to make radical changes. Juniper is wildly better positioned than Lucent and Nortel, and they are much bigger companies.

What could trip up a tech recovery?

One is the government, broadly defined. Right now, you could be confused about what the government's objectives are. Massive tax cuts at the same time as huge increases in Medicare drug benefits. That places an enormous burden on the economy. We have a good thing here, and we can either nurture it so it lays more golden eggs, or we can have a nice goose dinner. Washington looks to be plucking feathers out of the goose.

The second threat is the mismatch of capital and opportunity. One of the residual issues of the mania is that there's an exceptional amount of capital to invest in startups. I'm nervous that this will result in mindless competition. We're still seeing a lot of that.

Bottom line: I think the burden of proof is on the guys who are negative. We've seen this more than I can count -- people thinking there will be dramatic increases in tech spending on top of no interesting innovation. I don't believe it. That feels like the eight ball off the two ball off the four ball into the corner pocket.


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