Over the Rainbow In Silicon Valley

The Washington Post - October 26, 2007
Steven Pearlstein

From washingtonpost.com

SUNNYVALE, Calif. Inside an unassuming one-story building halfway between Palo Alto and San Jose, Amir Mashkoori and his team are putting the finishing touches on a revolutionary technology that aims to take the silicon wafer out of Silicon Valley.

Instead of etching an electronic circuit onto a thin piece of silicon, the team at Kovio thinks it has found a way to "print" a simple circuit on a piece of steel foil, using a special ink that can conduct electrons at high speeds. If they are right, they predict, there will be a need for a trillion of these low-cost computer chips every year to keep track of every part and finished product in every supply chain in the world.

The idea underlying this technology was not developed at nearby Stanford or Berkeley, but at the Massachusetts Institute of Technology. But when the professor set out to commercialize it, his venture capitalist, Vinod Khosla of Kleiner Perkins Caufield & Byers -- whose earlier successes included Sun Microsystems, Juniper Networks and Corvis -- insisted that he move the company to Silicon Valley, to tap into the deep well of chip-making talent and plug into Kleiner's network of managers, academics and financiers.

It's a good thing, too. Because several years later, when Kovio needed to find a company that could manufacture the high-tech presses it needed, it found one 10 miles away, at a company Khosla found through another investment.

A similar story is told of Mark Zuckerberg, the precocious Harvard student who thought he could turn an informal social networking site into a money-making business. After being turned down by East Coast venture capitalists, Zuckerberg headed west and found an angel investor in Peter Thiel, a founder of PayPal. Thiel put $500,000 into Facebook for a 10 percent stake and introduced Zuckerberg to a former PayPal colleague, Steven Chen, who signed on as one of the company's first engineers.

Three years later, Chen has long since left Facebook, founded the video-sharing Web site YouTube, and sold it to Google for $1.65 billion. And Zuckerberg has become the crown prince of Web 2.0, with a company that boasts 50 million users, a new ad deal with Microsoft and a valuation of $15 billion.

Kovio and Facebook are two companies that might well have put down roots west of Boston rather than south of San Francisco. And why they didn't goes a long way in explaining why Silicon Valley remains the world capital of the Internet and computer technology.

The explanation starts with a tight, insular, at times incestuous business elite, in a small geographic area, where people feed off each other's energy, money and ideas. This entrepreneurial ecosystem is unmatched not only in attracting and nurturing young talent and young companies, but in recycling the talent and companies that are already here. At the center of the system are a handful of angel investors and venture capital firms that have had a hand in building many of the region's most successful companies.

Amid the euphoria and hype that now surround Google, Facebook and other Web 2.0 companies, it is easy to overlook the "old tech" companies that have had a remarkable knack for reinvention.

Apple was written off several times before resurrecting itself with the iPod and iPhone, while Intel and Hewlett-Packard have been through celebrated revivals. Among big telecom equipment makers, only Cisco has fully recovered from the recent bust.

Sun, which seemed to be in free fall a few years back, has apparently regained its footing. In enterprise software, Oracle has left its U.S. rivals in the dust. And don't forget Seagate Technology, the '80s highflier that survived price wars, Asian competition and a boardroom coup to regain the title as the world's biggest producer of hard disk drives.

There have been times when Boston, Austin, the North Carolina Research Triangle, Seattle and even Washington have had visions of becoming the "new Silicon Valley." Those places continue to incubate new companies. But none has been able to create and sustain as many large tech companies as you find here.

Paul Saffo, a technology consultant who teaches at Stanford, says the valley owes much of its success to the remnants of a "frontier culture that disrespects elders, values risk-taking and honors failure" in a way that is simply inconceivable in a government or financial center.

Only in Washington, for example, could you have a conference on the "creative economy," as Fairfax County did this week, featuring a session on "Creativity in the Department of Homeland Security."

And, as Khosla sees it, in places like Boston and New York, the venture capitalists tend to focus too much on business plans. "Big leaps of faith are not amenable to financial analysis," he said. "The way we look at things, if you have a belief in an idea, you can figure out the financials later."

This almost dismissive attitude toward financials crops up frequently, whenever the subject of a bubble or inflated valuations is raised.

Sequoia's Michael Moritz, an early Google investor, notes that because the valley's orientation is hard-wired toward the future, valuations there are always "too high" -- it's just that nobody remembers when they grow into those valuations, like an eBay or a Google.

But at some point -- and there is disagreement here on whether that point has been reached -- the amounts of money thrown around get so large that they become "corrosive," in the words of Google chief executive Eric Schmidt, and overpower the idealism that runs deep in valley culture.

"The little secret that few people on the outside realize is that people here aren't in it primarily for the money," explained Thiel, sitting in jeans and sweatshirt in the sleek offices of Clarium Capital, the hedge fund he runs. "For a lot of them -- for a lot of us -- it's always been about changing the world. And you know things have gone too far when you see people doing things just to make a quick buck. . . . I'm not seeing that yet."

Maybe not. It's worth noting, however, that his $500,000 Facebook investment is now valued at $1.5 billion.