By Stephen J. Morgan
WANTED: Entrepreneur with a solid idea for a product that will meet the needs of the technology marketplace. Must have management acumen and a working knowledge of computer chips, software, biotechnology, electronics or other fields that average people find hopelessly arcane. Must be driven to succeed (mere self-starters need not apply). Must be ready to put in long hours and be unafraid of risks. Can work anywhere, but willingness to relocate to California’s Silicon Valley a plus. Ultimate financial payoff commensurate with vision, determination and hard work.
You won’t find this job description in the classified section of your local paper. Somebody interested in starting a technology company, or joining a start-up, doesn’t scan the want-ads. But based on interviews with Wharton alumni now working in Silicon Valley — known by its inhabitants as, simply, the Valley — this is an apt short-hand description of a high-tech entrepreneur.
With this job profile in mind, what really is involved in starting a technology company? Is it easier to launch a firm these days than it was 10 or 15 years ago? Are low barriers to entry offset by the need to have not just a good idea, but a terrific idea that adds value to existing functions? What does it take to succeed?
To find out, we interviewed alumni with different perspectives — entrepreneurs who have been involved in starting companies from scratch, venture capitalists who finance fledgling firms, and executives at established technology companies. Some people we talked to have worn different hats, like the alumnus who played a key role in getting a firm off the ground and now helps manage a technology mutual fund.
In recent years, technology startups have blossomed like so many wildflowers in a mountain meadow. Once obscure companies such as Microsoft Corp. and Intel Corp. are now household names. The Internet, originally the province of the military and academics, is now a research, retailing and communications tool for the masses. Who would have thought as recently as a few years ago that your next-door neighbor would be able to create his or her own “site” on something called the “web”?
Shaking the Money Tree
One thing is for certain: the tech boom has not gone unnoticed by investors.
Each quarter, Coopers & Lybrand L.L.P. conducts a survey called the Money Tree that tracks venture-capital investments. For the third quarter of 1997, the 600 VC firms that were surveyed invested $3 billion in 646 U.S.-based companies. This brought total venture investments for the first nine months of 1997 to $8.6 billion in 1,916 financings. Coopers & Lybrand predicted that, by the end of 1997, venture investments would total $12 billion for the year, nearly $2 billion more than in 1996.
Software and communications companies received more financing, 22 percent, than any other industry segment during the third quarter of 1997. Internet-related companies received 18 percent. Among states, California received far more venture money than any other state — 41 percent. Massachusetts, a distant second, received 7 percent.
With all this cash available, you might think it’s easier to start a technology company today than in the 1980s. But that would be only partially true.
“There’s certainly more capital around, so in that sense it’s much easier,” says Ruthann Quindlen, WG’83, general partner at Institutional Venture Partners, a Menlo Park, Calif., firm that manages $735 million in venture capital and invests in early-stage companies in information and life sciences.
“However, the sophistication about investing in start-ups has grown tremendously in that time period,” Quindlen says. “So the requirements for a very large market opportunity, a good management team and technical expertise have escalated. In that sense it’s harder.”
“What’s more difficult is not so much coming up with a new idea but sustaining the growth of a business and generating profitability,” says William L. Larson, W’77, CEO of McAfee Associates Inc., a Santa Clara, Calif., firm that makes computer-security and management-software products. “For example, many Internet start-ups have been successfully funded and gone public, but few of them have earnings potential. They’re ‘concept stocks’ trading at high prices. I’m a big believer in stocks that generate earnings.”
Joe Durrett, WG’69, chief executive officer of Broderbund Software Inc., a Novato, Calif., maker of the popular games Myst and its sequel, Riven, notes that barriers to entry are relatively low, at least for software companies.
“First, people are very willing to finance you because they believe there’s a tremendous prospect of success,” says Durrett, an experienced consumer brands and direct-marketing executive who worked for Kraft General Foods and Procter & Gamble Co. before joining Broderbund in 1996. “Secondly, you don’t need major plant and equipment. The principal investment is intellectual capital, and the role of sweat equity is tremendous.”
Tales of Three Entrepreneurs
Carolyn A. Rogers, WG’86, graduated from the University of Colorado at Boulder with a bachelor’s in electrical engineering and worked at IBM Corp. as a design engineer. Later, she received an MBA from Wharton and joined Hambrecht & Quist Inc.
After more than six years as a senior technology analyst at Hambrecht & Quist, Rogers decided she “didn’t want to be a securities analyst for life … So I looked around for Plan B.” She was specifically interested in a start-up. What she found was “10 guys in San Jose, Calif., who didn’t have venture capital or business experience.”
In the spring of 1992, those 10 engineers had started a company called PicoPower Technology Inc., which made power-management semiconductor chips for portable computers. While Rogers was still at Hambrecht & Quist, she convinced the engineers that they needed her to write their business plan, a project that took six months. Rogers then joined PicoPower as vice president of finance and chief financial officer in the company’s 3,000 square feet of cramped space.
Rogers helped raise $5 million in venture money. She hired a controller and people to manage inventory. She filed patents and designed the company’s logo. She wrote press releases and coordinated trade shows. She helped the company grow from zero revenue to $50 million in three years. And she was a key negotiator in selling PicoPower to Cirrus Logic Inc.
“They didn’t hire me; I hired me,” Rogers recalls with a chuckle. “This group didn’t have fabulous contacts and I didn’t have a track record of running a company. But since they were disenfranchised, they let me do what I could do. That was a big opportunity … A lot of companies try to keep things constrained. We were so strapped, I stood up and ate lunch in the hall.” She worked 14-hour days, “harder than I have ever worked in my life.
“I certainly was a risk-taker,” she adds, “but I didn’t jump into that without knowing exactly what I was getting into. I thought the product was very good. I made sure I was taking the right risk.”
After PicoPower was sold, Rogers stayed with the firm to help oversee its integration with Cirrus Logic. She decided in 1995 to quit and take a year off, during which time she wrote a business plan for one entrepreneur, raised venture capital in Asia for another, and spent time with her two young children, born 17 months apart. In 1996, she returned to work full-time, opening an office in Palo Alto, Calif., for J.& W. Seligman & Co., a New York-based mutual fund company. Today, as vice president and investment officer, she is on a team that manages a $4.5 billion high-tech fund.
Dwight K. Morita, WG’77, likes to quip that his entrepreneurial bent is genetic. His father owned a plumbing-supply business in Hawaii. Morita’s grandfather, who had been born in Japan, picked up extra cash by distilling bootleg rum in the Hawaiian cane fields.
In 1986, Morita, who was then at General Electric Co., was one of seven people who started Synopsis Inc. in Research Triangle Park, N.C. Six engineers at GE’s Microelectronics Center received the company’s blessing and a loan to commercialize “logic synthesis” technology — software that could be used by companies to design and manufacture integrated circuits. The engineers had developed the technology at GE after the company stopped funding the research.
Morita, who had joined GE in North Carolina after stints at Intel and National Semiconductor Corp. in California, was approached by Aart de Geus, head of the engineering team. De Geus asked Morita to develop a business and financing plan for the new company, which was then known as Optimal Solutions Inc. Morita’s first role was as chief financial officer. He then became vice president of corporate development, focusing on strategy and mergers and acquisitions.
The company, which began with seed money and nine employees, had $22 million in revenues and 138 employees by 1990. Along the way, Synopsis continued to grow, partly by acquiring or merging with other firms. For its 1997 fiscal year — 10 years after it moved from North Carolina to Mountain View, Calif., its present home — Synopsis had revenues of $500 million and more than 2,100 employees. Today, it is a leader in providing products and services for designing complex electronic systems and integrated circuits.
“You’re always on edge,” is how Morita recalls his early days with the start-up. “Your success is never assured. It was only just before going public that we realized we had a sustainable business model. It’s easy to hit one product but to develop a sustainable franchise is a real measure of success.”
Morita says it took three to four years for him and his colleagues to begin to feel comfortable. Nonetheless, the experience was “the ultimate excitement, because when you start a company it’s like you’re working to change the world. For many entrepreneurs, that’s the driver. The driver is not making a lot of money. The driver is wanting to change the world.” After a moment’s reflection, he laughs and says, “Of course, I’m not going to turn the money down either.”
Brandon Watson, W’96, WG’97, and four classmates in a management course taught by Ian C. MacMillan, George W. Taylor Professor of Entrepreneurial Studies, started a firm called 5 Spot during their senior year. The students developed network-load-balancing software, a product that allows computer users to continue working without disruption if other parts of a network go down.
“I wrote the initial memo and pitched it to my buddies,” recalls Watson, 23, who graduated from Wharton’s Jerome Fisher Program in Management & Technology and submatriculated into the MBA program. “Most of us had technical background. This was fairly easy for us to grasp.”
It was never the partners’ intention to build a long-lasting company with 5 Spot. Since they had accepted jobs at other companies, the 5 Spotters decided to develop the product and then try to sell it to an established software company.
The business was built solely by sweat equity. “To date, we’ve put no dollars into this, which is phenomenal,” says Watson. “That was one of the lessons we learned from MacMillan: when you can spend no money, do so.” The bankers and lawyers advising 5 Spot are friends. Says Watson: “If we sell [the business], they take a certain percentage and a fee.”
The Wild West View of Entrepreneurship
Ambition and talent are clearly pivotal in making a start-up a success. But is success largely the result of one person’s vision or of having a well-tuned management team in place?
“People have this view of entrepreneurs as the great individualists, the Wild West view of entrepreneurship. That’s the wrong way to think about it,” says Gordon Hull, WG’89, a former colleague of Morita’s at Synopsis and now a general partner with CMEA Ventures, a venture-capital firm in San Francisco.
“A better way is that when you have complex systems, you’re interdependent with others to bring certain skill sets or experiences to bear,” Hull says. “You can have an individual initiate a company, but really it’s a group of very talented and interdependent people coming together to build the company and create products and value. . . Typically, the one factor that correlates most highly with success is a management team that has done it before in a similar industry.”
A slightly different view is espoused by Ken Schroeder, WG’69, president and chief operating officer of KLA-Tencor Corp. in San Jose, Calif., a world leader of chip-inspecting tools that help semiconductor companies detect and eliminate problems in the manufacturing process.
“The common element in success is one person who is the visionary for the business,” Schroeder says. “I’ve seen companies with good and bad management teams, and they can both be successful. I’ve seen companies with everything going for them that fail. I’ve seen companies undercapitalized. But if a company has one guy or woman who really understands the market, and sees a problem and is able to choose the winning technical solution from a cost-performance point of view, that’s usually the key.”
Broderbund’s Durrett believes some technology start-ups hurt their chances for success because they don’t focus enough attention on customers.
“Increasingly, the most important element [in success] is not technology, it’s knowledge of the consumer. This is oft repeated but not oft followed,” Durrett says. “If you think, ‘If we make it, they will use it,’ you’re in deep trouble. But if you’re in a situation where ‘They need it and we can make it,’ you’re going to win.”
John Dean, WG’74, president and chief executive officer of Silicon Valley Bancshares, a Santa Clara, Calif., firm that provides financing to emerging growth technology and life sciences companies, sums up the key to success this way: “People, people, people. You have to have a good product. There has to be an eventual market need. But great ideas and great products fail because of people.
“What you would hear in the Valley, from venture capitalists and others, is that management of people is so important,” adds Dean. “It happens every day: Venture capitalists will come in [to a fledgling firm] and say, ‘The concepts are there, but you need new management to succeed.’”
Identifying a Growth Market
McAfee’s Larson offers this perspective on what it takes to launch and build a company: “It’s easier to surf a wave than thread a needle. If you pick a high-growth market, you can make mistakes and do well. Identifying trends is the most critical thing. Behind that, you want to have a business model that generates cash, because cash is king when you’re young. You don’t want to rely on external financing. The third factor is culture. You have to set a direction and have leadership and layer in processes to allow people to achieve their potential. True leaders empower ordinary people to do extraordinary things.”
Quindlen of Institutional Venture Partners, who personally investigates thousands of possible investments a year but actually puts money into only two or three companies, confirms Larson’s view. She says her company looks at several factors before deciding to funnel money to a start-up.
“The first thing we look for is a huge market,” says Quindlen, whose firm has a Web site that invites entrepreneurs to submit proposals. “If you have a large market, you can still perform less spectacularly and still have an opportunity [to succeed]. That’s first and foremost. The second thing is to have great people. I don’t mean super-seasoned people, but visionary, market-oriented people who can lead. If you have those ingredients, your chances for success increase tenfold.”
Several alumni agreed that the success of so many technology firms has led to a problem — a shortage of qualified people to fill positions needed to help companies in the Valley grow. Notes Hull of CMEA Ventures: “These businesses are growing so quickly they’re outstripping the labor force.”
Still, the alumni say the Valley remains a superb place – if certainly not the only place — to launch a company. For one thing, there is an infrastructure of experienced venture capitalists and related legal and financial experts. In addition, the Valley is home to some valuable intangibles that may be scarcer in the more buttoned-down East.
“There’s an attitude about entrepreneurs being at the top of society’s food chain here,” says Hull. “There’s that frame of reference that says to talented young people that a good thing to do is become an entrepreneur as opposed to a doctor or an investment banker — or a venture capitalist, for that matter.”
No one, of course, likes to bungle a start-up. But Hull notes that Valley entrepreneurs are risk-takers, and the prevailing Valley attitude is that you can accept and learn from failure. Hull says one entrepreneur he has worked with “has had six great successes and one huge failure. But that failure didn’t stop him from starting another business.”
Hot Areas and Good Advice
Alumni offered opinions on a few areas of technology that show the most promise going forward.
Computer networking is “huge” because there’s “such an opportunity to become acquired within a 12- to 18-month window,” Quindlen says. “We are heavily invested there.” Quindlen also likes firms specializing in electronic commerce and security.
“Software for networks has been a great area,” says Schroeder of KLA-Tencor. “Computing has been getting cheaper and cheaper and that trend will continue.”
Internet-related companies “will have a significant impact on the way we do business in the United States at the consumer level,” says Dean of Silicon Valley Bancshares. “I can’t tell you how it will end up but there’s a richness of creativity there.”
As for advice to would-be technology entrepreneurs, “talk to customers,” says Quindlen. “It’s much better to come to [a venture capital firm] with some kind of picture from customers on how they would use the idea you’re thinking of creating. The second thing is be bold. These rewards do not go to the meek.”
“Spend a lot of time trying to network and getting to know people of like mind who want to start a company,” Schroeder says. “Keep an eye out for that visionary or try to become one yourself.” In addition, “Hang onto the equity of the company … I think a lot of companies end up giving too much away, whether to venture capitalists or someone else.”
Synopsis’ Morita says the most important skill missing in the Valley is marketing. “I’m talking strategic marketing, strategic thinking,” he says. “There’s no lack of technology. The biggest difference I see in making a successful company is having the right technology and the right marketing outlook.”
What’s up these days with Watson, Rogers and Morita?
Watson is trying to sell his start-up and working full-time for Microsoft as product manager for digital television. “We’re changing the future of television,” he offers. “I’m trying to figure out what TV of the future is going to look like, how we’re going to bring it to the masses, how the TV and computer will interact, and how these new forms of communication and entertainment might take shape.”
Rogers says she’s thrilled to be with J. & W. Seligman, but doesn’t rule out the possibility of someday getting involved in another start-up. “In a heartbeat I’d do it again,” she says. “It was such a good decision [to join PicoPower]. It wasn’t monetary. It was self-esteem, fun, adventure, stimulation. It increased the surface area of life.”
Morita has cut back on his involvement at Synopsis, where he now holds the title of business strategist. But he’s busy as chairman of another start-up called WorldRes, an Internet company that delivers a web-based system for hotel sales, marketing and reservations. Morita, a Presbyterian, also is applying for admission to San Francisco Theological Seminary, because he feels that success can sometimes cause technology entrepreneurs to become proud and self-absorbed and to lose sight of a much bigger picture.
“[People] are working in technologies where they’re literally changing electrons or atomic structures or, in the case of biotechnology, the nature of the genetic code,” says Morita. “Folks involved in that type of work oftentimes miss the mystery of God because there’s a sense that we control things. It’s an illusion that eventually breaks, and when people experience that, they need help in establishing their spiritual life.”
Interview with Wharton Dean Thomas P. Gerrity
Technology: Changing the Fabric of Everything We Do
From 1969 to 1989, Wharton Dean Thomas P. Gerrity was chairman and CEO of Index Group, one of the world’s leading consulting firms in the strategic management of information technology.
In the years since then, says Gerrity, who was appointed dean in 1990, “the management issues created by technological advancements haven’t changed that much because the real power is not in the technology per se, but in its use and application by people.”
At Wharton, says Gerrity, these uses and applications are everywhere. For example:
– New digital video capabilities are enabling Professor Jeremy Siegel’s wildly popular market commentary to be broadcast to various locations on campus.
– Wharton’s SPIKE Communications Software provides a single, customizable interface to the School’s rich array of online student services.
– A new web-based interface called Wharton Research Data System (WRDS) harnesses large data sets for use by faculty and students, including stock prices and returns for more than 6,500 companies, information from Standard & Poor’s on 7,000 publicly held companies, and macroeconomic data going back to 1946. Stanford and USC business schools have already adopted the system.
– The Wharton Technology Club — which last fall drew 200 students to its first meeting — is sponsoring a speaker series throughout the year, a career fair on the West coast this month and a conference on campus in February. Five years ago, the club didn’t exist.
– Faculty approved a cross-functional MBA major this fall to educate technological entrepreneurs and future leaders of technology-based companies. Courses range from “Innovation, Change and Entrepreneurial Management” and “Technology for Managers” to “Telecommunications Technology and Competitive Strategy.”
– A Wharton professor and research director are co-editing a book — written entirely by members of the faculty — that identifies competitive strategies for firms in emerging technologies.
– The Career Development & Placement Office reports that over the past three years 246 MBA students took high-tech positions, the majority in Silicon Valley.
– At last spring’s Wharton-India Economic Forum in Philadelphia, India’s finance minister addressed conference participants by live video feed from New Delhi.
The use of technology, says Gerrity, “has changed the fabric of virtually everything we do at Wharton.”
New Opportunities for Individuals
If you look at the global village, “information and communications technology is one of the driving forces behind its creation,” Gerrity notes. “If you look at internal productivity increases, many of them are coming from the ability to exploit information and communications technologies throughout the organization … And if you look at the creation of new industries and the collapse of old ones, much of that is driven by technology. In the financial services industry alone, the cost of consumer-oriented financial services is clearly plummeting with the rise of the Internet. It’s at the inception, but the trajectory is clear. Middlemen will be eliminated as new opportunities are created for individuals.”
Given the almost limitless possibilities suggested by new uses and applications, Gerrity asks, how does a manager weave technology into the fabric of an organization, both internally and externally, in ways that exploit the technology’s ability to create value?
Some of those answers can be found in the new approaches to managing technology that are a focal point of faculty research throughout the School, Gerrity says.
Current research topics include, for example: the role of information technology on productivity in the U.S. retail banking system; the nature of technological change on wireless communication; global technology and its impact on national markets and nation states; electronic commerce; the need for consumer protection in the global information infrastructure; the management of technological change; how electronic commerce will influence the relationship between suppliers and retailers; and electronic commerce’s effect on business-to-business marketing.
Technology, especially information and communications technology, “has already become an everyday tool within many organizations, including ours,” Gerrity says. “Technological expertise pervades the Operations and Information Management (OPIM) department, for example, but it’s also in finance, marketing, public policy and so forth. We are integrating the application and exploitation of technology into the way we teach different disciplines.
“Whether a student thinks about marketing as an area of study or as a specialization, he or she will learn about the use of technology in that field. Electronic commerce alone is a whole new channel for building images, representing products, linking to customers, closing sales, managing transactions — the works. Technology clearly has a huge impact on what we research and teach here.”
From the economist’s point of view, the free flow of ideas and knowledge “makes for more and more perfect markets,” says Gerrity. “The more efficiently market mechanisms work, the smarter people are about effectively allocating resources.
“But the availability of so much information can have major effects on companies. It makes the world much more transparent in such areas as market research and recruiting. If you are looking for top talent, it is all too easy to go to a company’s web page and begin hunting” for who is responsible for what.
Competitors, of course, can access information about your company just as easily. “So if the information is all readily available, then the premium is not on getting the information but on turning it into knowledge that you have command over and that you manage effectively.”
Although the business community is just beginning to “understand high performance learning organizations — those with an open values-based culture that encourages innovation — Wharton itself has already made progress adapting to this increasingly technological age,” says Gerrity.
As for the 69,000 Wharton alumni worldwide, “we are in the middle of enhancing our virtual community — a secure and searchable web-based communication system that will offer both contact and calendar information,” says Gerrity. “There will be increased networking opportunities for career development and community building, and new ways to reconnect with the School.
“Technology no longer belongs to the specialist,” he says. “It’s a brave new world for everyone.”