"Not Your Father's Silicon Valley"


There are smart tech investors, and then there's Roger McNamee, a man with a reputation for spotting tech trends before they happen. In the early 1980s, one of McNamee's first investments was ADP (ADP), a small company that went on to become the gorilla of automated payroll processing. In 1999, he co-founded Silver Lake Partners, a leveraged-buyout firm that specializes in taking sickly tech outfits off the public markets and fixing them.

His latest investment venture, Elevation Partners, has a decided pop-culture twist. Formed in April, one of its managing directors will be rock musician Bono, the sunglasses-wearing lead singer of rock band U2. Bono will presumably help the Silicon Valley denizens mingle with the Hollywood crowd and aid Elevation Partners' search for companies that combine the tech and entertainment industries.

McNamee, who moonlights as a guitar player in a local rock band that's slightly less known than Bono's iconic Irish group, recently spoke with BusinessWeek Correspondent Jim Kerstetter about what's still to like in Silicon Valley and what kinds of technology are catching his attention. Following are edited excerpts from their conversation:

Q: What's your prognosis for Silicon Valley right now?

A: The outlook for Silicon Valley is terrific. The economic downturn had a brutal effect on the emerging technology centers in Austin, New York, Seattle, Atlanta, and Washington, D.C. Silicon Valley got banged up badly -- but has come back very strong. I think the Valley remains the world's preeminent entrepreneurial community, and its relative advantage is greater than it was at the peak of the bubble.

Q: So what companies intrigue you right now?

A: Think about the coolest companies in our economy: Google (GOOG), Yahoo! (YHOO), eBay (EBAY), Apple (AAPL), Electronic Arts (ERTS), Pixar (PIXR), PDI Dreamworks. Every one is in Silicon Valley.

Google, Yahoo, and eBay are the leaders in the online world. Apple is the thought leader in music. Electronic Arts is the clear leader in video games. And Pixar and PDI Dreamworks are thought leaders in the movie business. It's definitely not your father's Silicon Valley!

Silicon Valley has long been a hotbed for semiconductors and computers, but now it's also a big player in media markets. Pixar and Dreamworks are succeeding in the movie business the old-fashioned way -- with great stories. Their technology is fabulous, but the success of Pixar and PDI Dreamworks has nothing to do with gimmicks. They have better content and a better business model.

Apple put together a compelling online music-distribution service -- saving the day for the music industry, which had been in denial for five years. And Apple pulled this off despite a market share of only 3% in personal computers.

Q: So what else matters right now?

A: I think wireless is a gigantic area of opportunity, and we're still just scratching the surface.

Q: We're talking mostly consumer stuff. What about technology for corporations?

A: We're between waves of enterprise technology. There are some interesting things percolating in the enterprise world, but they're less apparent than the innovations in consumer technology. I think the next big enterprise wave will come in Web services. It will take a few years to get the technology right, though.

Q: What do you see as the big bets to be made by the venture-finance community right now?

A: In enterprise software, the big opportunity is to build out the Web services platform. Companies will have to experiment before the Web services applications market can take off, so the near-term opportunities will be in tool kits.

There's lots of excitement about RFID [radio frequency ID tags for tracking all sorts of goods], but that's really just a peripheral, like a bar-code scanner. The real money will be in software to manage the flow of information created by RFID (see BW Online, 8/31/04, "Inching Toward the RFID Revolution"). You'll need trusted third parties that can hold and manage data as it moves through a supply chain. Microsoft (MSFT) can't do this. Oracle (ORCL) can't do this. It's got to be someone new and independent.

By the way, the venture community still has too much capital to invest, so money is going to areas that scare me. Nanotechnology and electric-power technology are two examples. From where I sit, both offer more risk than return, at least in the near term. I think venture is most successful when it invests in incremental technology which can make a difference over the next three to five years.

Q: Have you done anything in biotech?

A: Not at the venture stage. If big pharmaceutical companies can't predict which biotech drugs will work, how can I expect to do it consistently? I just don't believe biotech fits the venture model.

Q: Because it takes so long to create a product?

A: Yes, but also because the capital intensity is very high, and the probability of success is very low. I think it's amazing the venture industry has made it work as well as it has.

Q: Have they made it work very well?

A: Interestingly enough, the venture firms who have stuck with biotech over the past decade have done well for their investors.

Q: Are you concerned that foreign graduate students are either unable to come to the U.S. or simply staying in their own countries?

A: I find that to be enormously concerning. I think our immigration policy took a giant step backward because of fears associated with 9/11. Making it hard for graduate students to come here does not make America safer. It makes us weaker. We need to fix that right away.

Q: Will it get fixed?

A: We have to fix it. If we don't, our economic competitiveness will suffer dramatically.

Q: Do you think people in government understand that?

A: The politics of terrorism does not allow for thoughtful government. For most of our politicians in Washington, getting reelected seems to outweigh any concerns they may have about the wisdom of their post-9/11 policies.

Q: Do you think this could help create Silicon Valley competitors in other countries?

A: Yes, but it won't happen overnight. The risk is that the best and brightest engineering students don't stay in America...or never come here in the first place.

Q: Are there any candidates?

A: Yes. China and India are trying like crazy to imitate Silicon Valley. Right now, both have export economies. They take some jobs from America, but in return they help us sustain unusually low rates of inflation. Eventually China and India will hit a tipping point where domestic demand starts to consume a larger portion of their total economic output. At that point, they will consume more goods from America but will stop helping our inflation rate.

Q: How long have you been in the Valley?

A: I've lived in the Valley for 13 years, and I've invested here since 1982.

Q: What has changed?

A: Silicon Valley now makes technology for the masses. In the early '80s, tech was the domain of guys in white lab coats. Real people didn't actually use technology. Now the whole population knows how to use a PC and a cell phone. Technology is part of the social fabric. How cool is that!


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus