They are already the stuff of legend. They ran with a crowd called "The Magnificent Seven" (or "The Traitorous Eight," depending on who you're talking to). And many believe that if these early venture capitalists hadn't stuck their necks—and their checkbooks—out, there'd be no Silicon in the Valley.
The venture capital business is barely 30 years old—relatively young in the annals of electronics (the transistor was invented in 1947)—but it has already come full circle, experts say. VCs today are looking for the same qualities in entrepreneurs that folks such as Arthur Rock, Don Valentine and Tom Perkins did 30 years ago: a great idea, a huge potential market and solid leadership. There are a few significant differences. VCs no longer want to fund companies proposing to build or buy a fab, factory or foundry. And, now that the memories of the dot-com bubble are fading, VCs have returned to the notion that investing in a startup is a long-term commitment, not a get-rich-quick scheme.
It's tough to believe, but the VC industry as we know it didn't really exist until the mid-1970s. Before that, says Kirk Walden, national director for venture capital research at PricewaterhouseCoopers, "high-tech entrepreneurs went for backing to the 'three f's': friends, families and fools." The high-technology industry was still in its infancy and had no track record that potential investors could use for analysis and evaluation. Investment banks and brokerage firms wouldn't go near tech startups.
That's why when eight "traitorous" engineers left Shockley Semiconductor to start their own company, they turned to seminconductor investor Rock to help raise the capital to start Fairchild Semiconductor. Venture capital and high-tech have been intertwined ever since, through some spectacular successes, such as Apple Computer, Cisco Systems and Intel, and some spectacular failures, such as PC makers Osborne, Franklin, Eagle, Morrow and Kaypro.
"There's a natural affinity between high-tech and VC, because other types of industries can get other types of funding," Walden says. That was true 30 years ago and remains true now: Real estate ventures can raise capital because something tangible—property—is involved. Not so with an idea. "I think the single biggest impact venture capital has had on high-tech is the recognition that individual innovation can be commercialized in the form of a company," says Walden.
Both the high-tech and VC industries have gone through boom and bust cycles. Today's environment, says Walden, is not all that different from that of the post-PC boom in the late 1980s. "Back then, you had about 50 PC companies: all with a 1 percent share of the market," he says. PC consumers had a lot of choices back then-few of them very good. "When's the last time you heard of anybody buying a Radio Shack or Eagle PC?"
After each downturn, says Promod Haque, a managing partner of Norwest Venture Partners, the high-tech industry has emerged stronger. "Too many companies are founded and then there's a shakeout, but out of the ashes come new technologies and new ways of using them," he says.
The bad times have prompted changes in the ways VCs invest their money. Early VCs were willing to fund first-time entrepreneurs with big ideas. These days, VCs are looking for founders with some kind of track record and companies with a solid product or, at least, customers. "If you look at Norwest today, I'd say we are a lot more selective than we have ever been before in terms of the kind of entrepreneurs we back," says Haque. "We are not backing first-time entrepreneurs; we want to back those that have proven they can build products and garner orders from customers."
VCs are also not backing companies that require a huge infusion of capital to build an infrastructure. "Venture capitalists would run from the 'I want to build the next HP' pitch," says Bruce McWilliams, entrepreneur and CEO of chip-packaging developer Tessera. "That would take a huge amount of dollars, and the likelihood of success wouldn't be that high."
Investors say the companies being funded today are run more efficiently than their predecessors. Outsourcing, Haque says, means that companies can develop and build products without a lot of manufacturing overhead, and VCs want to talk to managers who can handle that sort of extended development environment right out of the gate. "We're backing companies that demonstrate that they understand capital efficiency," he says. Funding is also coming at later stages: More investments are being made in late-stage companies rather than startups.
Finally, venture capitalists are again becoming patient, willing to invest for the long haul. "The Internet boom was a period in which people wanted to get and in and out of their investments in 18 months," says Walden. Now, he says, "The motivation is not, 'I want to flip this deal right away'; it's, 'I want the confidence that I can see the end of the tunnel.'" This harkens back to the early days of venture investing, when VCs were prepared to stick with a company for a decade or more. Folks such as Arthur Rock still sit on the board of many of the companies they helped create.
Walden and others expect the venture industry and high-tech to continue their symbiotic relationship. "VCs will continue to fuel innovation: things like wireless and global positioning systems, things with the coolest new chips and the coolest new software applications. That's what we should expect them to do."
"There will be some failures," he adds, "but VCs have learned to expect that."
