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How to Start a Startup.Build something users love, and spend less than you make.
Hiring is Obsolete.The market is a lot more discerning than any employer.
How to Make Wealth.To get rich you need to get yourself in a situation with two things, measurement and leverage.
Why to Not Not Start a Startup.All the reasons you aren't doing it, and why most (but not all) should be ignored.
Ideas for Startups.The initial idea is not a blueprint, but a question.
Why Smart People Have Bad Ideas.A hacker who has learned what to make, and not just how to make, is extraordinarily powerful.
The 18 Mistakes that Kill Startups.If you avoid every cause of failure, you succeed.
The Hardest Lessons for Startups to Learn Some things about startups are kind of counterintuitive.
How to Fund a Startup. Venture funding works like gears.
The Hacker's Guide to Investors. Hackers don't know how little they know about this strange world.
How to Present to Investors. Explain what you're doing and why users will want it.
A Student's Guide to Startups.Starting a startup could well become as popular as grad school.
The Venture Capital Squeeze. Why not let the founders have that first million, or at least half million?
The Other Road Ahead.You may not believe it, but I promise you, Microsoft is scared of you.
What Business Can Learn from Open Source.There may be more pain in your own company, but it won't hurt as much.
What the Bubble Got Right.Even a small increase in the rate at which good ideas win would be a momentous change.
A Unified Theory of VC Suckage. If you're not one of the very top funds, you're condemned to be the bad guys.
miércoles, 6 de junio de 2007
They Would Be Gods.
The group that would eventually make Santa Clara, CA, "Silicon Valley."
In discussing the development of semiconductors in Silicon Valley, many roads originate with Arnold Beckman, the man who hired William Shockley away from Bell Labs and brought him to the San Francisco Bay area to establish the Shockley Semiconductor Labs of Beckman Instruments (now Beckman Coulter). Semiconductors had been around for several decades - odd materials that had the ability to conduct electricity under certain conditions. They are, Gordon Moore says, "halfway between insulators and metals. The wonderful thing about semiconductors is that you can control the amount of their connectivity through introducing impurities."
Bell Labs, as the research arm for the Bell companies - owners of millions of electromechanical relays across the nation used in its telephone switching networks - was one of the most interested parties in semiconductors and their ability to conduct electrical currents. Bell executives had the foresight to hope that, one day, Bell could replace its troublesome relays with more reliable devices made of semiconductors. Bell had also laid underwater cables that used vacuum tubes for repeaters at regular intervals, making the cables unreliable. So Bell funded a semiconductor laboratory in Murray Hill, N.J., which is where Shockley, Walter Brattain, and John Bardeen produced the work that received the Nobel Prize in 1956 "for their researches on semiconductors and their discovery of the transistor effect."
As the head of one of the country's leading scientific companies, Beckman understood the importance of semiconductors. Hence, he hired the greatest name in the industry to establish his company in that field, setting Shockley up in his own research and development facility. Although Beckman Instruments was based in Los Angeles, Shockley's new labs were set up near Palo Alto, CA, because Shockley's mother lived there.
The Shockley Semiconductor Labs were short-lived, however. With the exception of Robert Noyce, none of the key engineers working there could stomach Shockley for long, despite his unquestionable technical brilliance. In 1957, the labs' senior members selected Gordon Moore to contact Beckman and have Shockley moved aside as leader of the labs. When that didn't work, seven men - and eventually Noyce, making it eight - left the company. Moore still remembers the night he drove to Jean Hoerni's house to make the call to Beckman and also that it did little good.
In the end, Shockley may be most remembered for hiring the talented group and, some say, subsequently driving them away to join Fairchild Semiconductor. Moore, one of the "Traitorous Eight" who left to form Fairchild's semiconductor operation and eventually become one of Intel's founders, remembers the evening he was sitting at home in Maryland, when the phone rang, and the voice on the other end said, "This is Shockley." That's about all I remember about the call, but I took the job he offered. I had been doing pretty much esoteric work at Johns Hopkins University, looking at the spectroscopy of metals. I didn't know the first thing about semiconductors, but Shockley thought he needed a chemist. None of us knew his reputation as a manager at that time, but maybe we should have suspected, as none of his guys from Bell Labs were joining him in California." The son of a local policeman in the small coastal town of Pescadero, CA - directly west of what would become Silicon Valley - Moore wanted to return to California. Shockley's reputation and the incredible wage being offered, $750 a month, were all it took to bring Moore home, where he became one of the formative members of the group that would eventually make Santa Clara, CA, "Silicon Valley."
By the time Moore was on his way to California, commercial semiconductor manufacturing was underway in Boston, Phoenix, Dallas, and New Jersey. The establishment of the Shockley Semiconductor Labs was the first step toward adding the Bay area to that list. Many books have been written about the semiconductor industry's founding, with Charlie Sporck's book excerpted in our August issue as one of the few firsthand accounts (see "The Birth of Fairchild Semiconductor," August 2001, page 60). Trying to capture the semiconductor story for this issue of Upside meant tracking down the people who created the semiconductor industry - a nerve-wracking process. Noyce, eulogized in Upside (July 1990), was one of the first of his generation to pass away. But many of the other larger-than-life people from Fairchild Semiconductor - Eugene Kleiner, Jay Last, Pierre Lamond, Julius Blank, Andrew Grove, and Moore - are still around to provide insight into what it was like when the semiconductor industry was first being created. For this special issue, I particularly wanted to answer the question of whether such a technological discontinuity as the semiconductor revolution will ever appear again. The answer lies in a thorough understanding of how the Valley became "siliconized."
Just as Shockley knew the labs would need chemists, he knew that mechanical engineers would be required, so he hired two: Blank and Kleiner. Blank was a classic engineer and had worked at Babcock & Wilcox, where he designed and built the huge boilers used in power plants and utility companies. As a boy, Blank attended a technical high school in Brooklyn, where he learned the craft of building things. In 1943, the U.S. Army grabbed the young man, sent him to college, had him repair military aircraft, and then sent him to Europe to fight in World War II battles such as the Battle of Hurtgen Forest. By the time Blank returned to the States in 1946 to finish his bachelor's degree in mechanical engineering, he already had a lifetime's worth of practical experience. Then it was off to Babcock & Wilcox, Goodyear Aircraft, and, finally, Western Electric, which set him to work with germanium phototransistors, among other devices, to figure out how to replace its mechanical relays.
In 1956, Dean Knapic, a Western Electric alumnus, offered Blank a job at Shockley Semiconductor Labs. After traveling to Palo Alto to be interviewed by Shockley, Blank, like all the other original employees, underwent lengthy psychological testing - possibly an artifact of Arnold Beckman's experience in one of his firm's plants in Los Angeles, where an employee went berserk and stabbed a co-worker to death, or a result of Shockley's unorthodox views on personnel practices. Despite the days-long grilling, $10,000 a year plus moving expenses looked pretty good.
Blank and Kleiner shared all of the mechanical-engineering work at the company, which was housed in a small stucco building at 391 South Charleston Road in Mountain View, CA (now a chair shop that bears an incongruous brass plaque identifying it as the birthplace of Silicon Valley).
Blank's first assignment was to build a crystal grower. Blank knew nothing about semiconductors. Fortunately, Leo Valdez and Victor Jones, hired by Shockley to actually grow the crystals, shared what they knew about the type of equipment they needed, and Blank went to work. "That's what it was like then. Bobby Noyce would walk in and say, 'I want you to melt some copper on this part.' Really vague instructions were the order of the day. I would do that, and then take it in to him. He'd look at it and tell me how to change it, or make some other suggestions, and we would go back and forth like that, making things up," Blank recalls.
Despite the lack of direction, Blank loved the work. After he joined Shockley Semiconductor Labs, Noyce, Moore, Last, Kleiner, and Hoerni appeared in short order. Blank remembers the group as a bunch of 20-somethings who liked to hang out together and see each other socially. He remembers the entire year and a half at Shockley Semiconductor Labs as an exciting time, ordering power upgrades, phone systems, air conditioners, and the radio-frequency (RF) oscillators needed to melt silicon. An indication of how Blank was regarded by his colleagues is the fact that Blank was nominated to recontact Beckman, after Moore's first attempt, about removing Shockley. "At first, it appeared I was successful," Blank says. Beckman endowed Shockley with a teaching chair at Stanford University that kept the good doctor out of the men's hair. Teaching, in addition to Shockley's speaking and travel demands after winning the Nobel Prize, initially seemed to have solved the issue. After a while, however, with Shockley coming back from trips and ordering entire projects restarted, it was clear that the problems would not be resolved. There was also Shockley's single-minded pursuit of the four-layer diode, perhaps left over from his days at Bell Labs, while many of the others thought silicon transistors were the direction they should be headed in.
Eugene Kleiner - co-founder, many years later, of the venture capital firm Kleiner Perkins - was another of Shockley's early hires. Kleiner was an immigrant from Europe. After leaving Vienna, Austria, he attended secondary school in New York. He then took work as a factory machinist, but, like so many of the remarkable men in this issue, he was drafted into the military. After the war, Kleiner earned a bachelor's degree from the Polytechnic University of New York and a master's in mechanical engineering from New York University. He taught engineering for a short while and then joined Western Electric, where he worked in the morass of the Bell system's relays and switches. Kleiner remembers Shockley as a charming person, a fascinating conversationalist, and, by reputation, one of the stars of Bell Labs.
Reconciling that impression of Shockley with the small, inadequate, and dirty building that Shockley had leased to start the company was the first of many events informing Kleiner that Shockley's technical brilliance was not matched by practical experience. Like Blank, Kleiner's first assignment was to build a crystal grower. It was this experience that brought Shockley down to earth in Kleiner's eyes. "I didn't know anything about growing crystals and [knew] nothing about furnaces. So I asked Shockley, but he didn't know. He just gave me advice, often the wrong advice, so our first device for growing crystals was a monstrosity. It didn't work. It was so large that we had to raise the roof of the building. It never worked. So I went next door to Sears, Roebuck and Co. and bought one of those large standing drill presses, and it had most of the features we needed. We had to change some things and add some things, but it formed the basis of our second and successful, crystal grower."
Then it was time to build a furnace, which entailed a similarly unsuccessful set of experiences. Still, "working with that team of men, Moore figured out the dispersal of gaseous materials," Kleiner recalls. (Moore was an expert glassblower. He actually created, by hand, the tube jungles in which gases were distributed, separated, and combined, thus allowing for single-step production of doubly diffused transistors.) "Knapic. Blank. It was a beautiful team. It was exciting," Kleiner continues. Once built, the furnace had to be kept on 24 hours a day. Kleiner and Blank, who lived close to the company, came in every couple of hours during weekends to check on the relatively delicate device. Kleiner remembers, 40 years later, that it was his wife who kept him going during those times (she also sang madrigals with Noyce at parties and social events). More importantly, she wrote a letter to Hayden, Stone & Co. seeking money for several of the "Fairchild Eight" - the letter that found its way to Arthur Rock and convinced Rock to find funding for Fairchild Semiconductor and, later, Teledyne Semiconductor and Intel. It was "one of the great letters of all time," Kleiner muses, thinking of that lovely unsung heroine.
Jay Last, now retired and living in Los Angeles, left Silicon Valley early on to become a vice president at Teledyne, where he helped Henry Singleton build that company from a single division to over 150 divisions. Last, a quiet electronics and optical engineer, worked closely with Noyce, and is responsible for much of the early manufacturing infrastructure of semiconductor technology. Surrounded by his collection of African art and the products of his publishing company, Last is, in many ways, uncomfortable sharing his life with strangers. His years of military research and development have remained a closed book long after his retirement. And the subject of Shockley is one that, despite the passage of 40 years, is not casually remembered.
Still, if you catch his attention, Last will explain that much of what helped build the semiconductor industry came out of Fairchild Semiconductor: improvements in growing silicon ingots and diffusing exotic materials across the substrate of silicon wafers. Last's own contributions from optical science - the creation of photographic masks that were used to expose patterns on the substrates and the development of etching processes through which lines and connections were created on the wafers in miniature - are tossed off casually. "None of that had been done. We were inventing everything," Last says. This includes, most notably, adapting these processes to wafer fabrication and manufacturing. Waving his hands, Last dismisses the greatest revolution in manufacturing since Henry Ford's achievements, but it was Last's special contribution: "the creation of step-and-repeat methods by ganging up these microscopes and devices on mechanically operated stages, so that we could create integrated circuits cheaply, quickly, and reliably." He holds out one of the first commercially integrated circuits, with its five gold leads, showing me the four-transistor device with a sense of wonderment, even after all these years.
"And this," he says, retrieving yet another device from a trove of first technologies. I notice a tiny "open here" legend printed on its side. Last smiles conspiratorially and says, "We knew that the people at TI were desperate to see what we were doing, and we knew that, as soon as we released these, they would get some, so I had these printed up for them." He grins at his one-upmanship with boyish delight.
He won't say it, but those processes, step and repeat, led to "batch manufacturing," which spread out of semiconductor manufacturing and into other technological fields, such as LED manufacturing, biotechnology, and, experimentally, nanotechnology, fostering a worldwide change in manufacturing technologies that will continue throughout the 21st century. Last is sanguine, comfortable with his accomplishments and a hoard of unmentioned patents. I sit pondering this guarded, gentle, and brilliant man who tells me that, despite the passage of four decades, he can walk into a modern-day wafer-fabrication facility and still know what the machines do, which is basically what he and his colleagues first laid down in the 1950s. Last thinks back on Noyce, his closest collaborator at Fairchild Semiconductor, with a fondness that is touching - an almost universal emotion among the giants still walking the Earth who helped to create Silicon Valley.
While the men were in a quandary over their problems with Shockley, there were other companies working with semiconductors. Boston-based Transitron Electronic was a contemporary of the Shockley Semiconductor Labs. Transitron was found by an eccentric pair of brothers named David and Leo Bakalar. One of the pair ran a shoe factory and was cheaper than blue jeans; the other was a Ph.D. who had worked at Bell Labs on transistor research. They recruited engineers to their firm by traveling through Europe and conducting interviews in major cities. They hired the brightest immigrants they could find, brought them to the United States, and worked them silly in the early days of discrete electronics components. Pierre Lamond, Wilfred Corrigan, Robert Swanson, Lester Hogan, and a young Hungarian immigrant named Leslie Vadasz passed through Transitron's doors and built a semiconductor company that vied with Texas Instruments for the number one position in the nation in the late 1950s. At that time, semiconductors like germanium were employed to produce devices such as rectifiers in small aluminum canisters, which electronics manufacturers used by the thousands.
Pierre Lamond, a jeweler's son who fought in the Algerian War and made contacts with American officers during a stint at NATO headquarters, wanted to find a way to work in the United States. It was clear that his field (physics and electron optics) was moving fastest in America. In 1957, a decommissioned Lamond saw an employment ad in the New York Times for Transitron. David Bakalar offered him a job on one of his recruiting trips through Paris. To get Lamond started, the Bakalars put him on the production line. In his third week, he was promoted to the head of production to replace his departing boss, and, in a few more months, he was promoted to device development engineer. It was a whirlwind introduction to semiconductor technology, and, for the one-year duration of his working visa, he absorbed everything that he could before returning to France. Lamond shopped for a company in his native country where he could apply his skills, but he found nothing comparable to his experience in Boston, so, by 1959, he was back at Transitron as the head of development.
Lamond's stint at Transitron was a short one, as most were. The Bakalars' approach was to "second source" parts designed by others (a polite way to describe their energetic copying of other people's products), which they would then sell to customers at cheaper prices. Lamond had heard of Hoerni's work at Fairchild Semiconductor in developing what would become known as the planar process of manufacturing semiconductor products. Lamond approached the Bakalars and told them that, if they were to compete, it was time for Transitron to invest in planar manufacturing, but they would have nothing of it, telling him to wait a few months until all the bugs were worked out of the process. Unfortunately for the Bakalars, the energetic Lamond had befriended Moore while presenting a paper at a technical conference, so the brothers' refusal to move Transitron along the path to original-product development came at a time when Fairchild Semiconductor's human resources manager was already courting Lamond.
In 1961, Lamond joined Fairchild Semiconductor, working for Moore. After one of the periodic diasporas of Fairchild's engineers to form a new company - in this case Signetics - and the loss of Lamond's direct supervisor, he was again promoted to lead device development. He remained at Fairchild from 1961 until 1967, when he became a member of another group leaving Fairchild, under Charlie Sporck, to restart National Semiconductor. Lamond remained with National until 1974.
Many of the Transitron staff passed through Phoenix (Motorola) or Dallas (Texas Instruments) before coming to Silicon Valley. Vadasz spent his three years of apprenticeship at Transitron, for $650 a month, before moving straight to Silicon Valley, where the man who had hired him into Transistron, Lamond, hired him again at Fairchild. As with others at Transitron, Vadasz found himself building whatever he needed. Need vacuum chambers to distribute evaporated dopants? Build them yourself, out of a piece of tube. Need some silicon wafers? Build your own furnace; dump in chunks of silicon lumps; start it spinning; dip in a piece of seed crystal, rotating it in opposite directions; pull it out slowly; and hope for the best. Everything else pretty much required working under a microscope with instruments held in your own shaking hands. Everybody who passed through the Boston sweatshop seems to have come out the better for having been there, and for having left.
For example, Wilfred Corrigan remembers someone from Transitron coming into a room, where he was reading about semiconductors, and telling him that the production line was a mess: "They told me to get out there and get it running right, so I went, and I figured out semiconductors later." Transitron was that kind of place.
Fairchild Semiconductor was, by comparison, a fortress of strong organization. Imagine coming into a company where at least a dozen future semiconductor company presidents and founders are working. At the head of the organization is Sherman Fairchild, founder of Fairchild Camera and Instrument, scion of one of the first investors in IBM, and head of a company with technology interests in multiple industries. A large part of the comparative stability at Fairchild Semiconductor was based upon its hiring of Ed Baldwin as general manager of its new semiconductor division. Baldwin recalls, "I came up from Los Angeles, and they interviewed me - all of the them, Noyce, Moore, [Victor] Grinich, and Last - but it was Moore that made the decision to hire me."
Their choice was for someone as eclectic as themselves. Baldwin's father was an itinerant intellectual: a musician, engineer, and writer. His father was related to a former prime minister of England, where his family hailed from, and the founder of a technical university that still exists in London today. Baldwin earned one of Carnegie Mellon University's first master's degrees in solid-state physics and then a Ph.D. in nuclear physics, also from Carnegie Mellon, where he worked in neutron and proton scattering. Baldwin also built Carnegie Mellon's synchro-cyclotron, one of the progeny devices of the Berkeley cyclotron.
In 1950, the young scientist was recruited by Hughes Semiconductors, of Los Angeles, during that company's heyday. There, Baldwin worked with people such as Simon Ramo and Dean Woolridge, two of the founders of TRW, on the miniature diodes Hughes produced for airborne computers. By 1956, Baldwin had risen to the head of product development in Hughes' computer division, and, when that was folded, he became head of product development for the semiconductor division. While at Hughes, Baldwin wrote his first two patents for the company. The first patent was on semiconductor photodiodes, and the second patent was for a device that would use the diodes to read hundreds of mainframe punch cards per minute. The company promptly gave him a $100 bonus, patted him on the head, and sold his division to RCA for a small fortune. At that point, Baldwin was ready for a career change.
Baldwin remembers Hughes as a great training ground where he learned about operations, plant maintenance, engineering, manufacturing, personnel, and research and development. At Hughes, Baldwin also learned how to work with brilliant technologists and how to act as a professional manager. Nevertheless, an ad in the Wall Street Journal, seeking an executive and a general manager for a startup in Northern California, caught his eye. Baldwin had been looking for new work for a while, and, along the way, he'd befriended a banker who knew a source of capital for Baldwin's possible own company. But Baldwin hadn't heard from the banker in months, and the offer to work with the likes of Hoerni and Moore proved irresistible.
Baldwin had been at Fairchild Semiconductor for several months when the banker turned up, having secured a commitment from a wealthy industrial-manufacturing family by the name of Rheem. The banker was ready to press a check for $5 million into Baldwin's hands. "It was the worst decision of my life. If I hadn't made [that decision] I would probably be at Intel today," he says, looking wistful, and then he smiles and starts telling the story of a lifetime's worth of companies he has started and run. Baldwin reminds me that, at one point, an engineer who left Fairchild Semiconductor to join him at Rheem Semiconductor took one of Fairchild's precious "recipe books" - a source of considerable disgruntlement to this day. Baldwin recalls, "When I found out about it, I gave him the living daylights, and I returned the book." Today, at a spry 82 years of age, Baldwin is running a startup in San Diego, Energy Development Systems, where he will be working in his field "until the day I die," having just earned the most recent of several patents on the high-power capacitors that fuel his dreams for tomorrow.
While Baldwin was departing to found Rheem Semiconductor, Vadasz was in the midst of four years of work putting down deep roots into the development of bipolar, and later MOS, semiconductor products. But Vadasz was also destined to leave Fairchild Semiconductor, and was hired by Noyce and Moore to work in research at Intel, the company Noyce and Moore founded with the intent of designing and building semiconductor memories. There was a growing market for semiconductor components, but Noyce and Moore felt that, if they could build solid-state, or thin-film, memories that would replace expensive and hard-to-manufacture solid-core memories, they would have ready customers among mainframe computer companies. It was a dubious market strategy at best, fraught with tough competition and only occasionally won by Intel. U.S. manufacturers ultimately abandoned the strategy and left memory making to Asian manufacturers.
Despite a well-published error having to do with a numbering scheme introduced much later, Noyce and Moore hired Grove and then Vadasz as their first Intel employees. Both Vadasz and Grove remain at Intel today. Ask Vadasz what he did in the beginning at Intel, and he'll explain that he worked on the technologies that led Intel into MOS manufacturing, the technique that is standard today. He goes on to admit that Intel's first successful memory products were good old-fashioned bipolar ones, like those of Fairchild Semiconductor. Press him for some details on the success he has brought Intel, and he'll tell you that it was Moore and others experimenting in the labs with MOS who finally figured out why the yields in the new technology were so low for Intel and made the process practical.
Out in the dry plains of Texas, Texas Instruments (TI) had been around since 1933, under another name, supporting the scientists working in the oil industry of Texas and beyond. A Texan giant of a man, Jack Kilby, had returned from Illinois to his home state with a bachelor's degree in electrical engineering to work with the resistors, capacitors, and discrete-logic products of his time - basically to build the instruments that TI manufactured. The Iliac was just being built when Kilby graduated from college, but computing was firmly on the horizon, and Kilby increasingly turned his attention to germanium and then silicon, spending a lifetime in the semiconductor field, with a single company. Kilby can sit and preach the semiconductor bible from memory, because, at TI, he did what all of his competitors were doing elsewhere, slowly experimenting with semiconductor materials. He developed the design and manufacturing processes that allowed TI to "get there first," making TI the undisputed leader in transistor, and then semiconductor manufacturing.
There's a hard edge in the 90-year-old's clear blue eyes when you ask him about the industry back then. "We didn't share anything in those days. We were all competitors, in everything. We went to the ISSCC [International Solid State Circuits Conference] and announced our progress each year, but we said as little as possible beyond what we had done, and we certainly didn't tell anyone about our processes." Kilby, recently awarded a Nobel Prize for the invention of the integrated circuit at TI, doesn't talk much about his or TI's primacy in the field; he seems proud just to have been a part of the efforts in building one of the first multitransistor semiconductor microprocessors - a six-transistor part that TI built for use in products such as portable calculators and the Minuteman program. Kilby knows all the names from the Valley - Moore, Sporck, and others - and has only praise to offer them and their work. Still, it seems as though his eyes burn bright, like fanned embers, when he remembers the competition of the time.
Awarding Kilby with the Nobel Prize for the invention of the integrated circuit is a touchy subject. No one has anything critical to say about Kilby, but a few people say that everyone knows that Noyce invented the integrated circuit. Still, the Nobel Prize - as was pointed out to me at least 10 times during the course of researching this article - is awarded only to living people; it's not awarded posthumously. So Kilby, who created an integrated circuit at about the same time as Noyce, ends up the sole winner. It's incongruous and a little bitter for everyone who loved Noyce, yet everyone is happy that the Nobel Prize committee finally recognized the achievement. It's one of those issues that makes people a little grumpy.
No account of the semiconductor industry would be complete without discussing Charlie Sporck, the creator, if not the founder, of National Semiconductor and the legendary head of manufacturing at Fairchild Semiconductor. He retains the same gruff attitude he has always had, but a hint of deep humor resides somewhere under the attitude. Despite getting on in years, Sporck is about half a generation behind many of the people in this story. Sporck was classically trained engineer manager out of the General Electric system when he joined Fairchild Semiconductor as employee number 854. He was a senior executive at Fairchild Semiconductor when the famous Eight were well on their way to creating a new industry, and he left the company just in time to take over a tiny manufacturer of passive electronics components and bend it toward the innovation that he identifies as the mother of all inventions: the planar process, the basic manufacturing technique that defined an industry. In a nutshell, planar processes are the methods by which successive layers of semiconductors and conductors are deposited on a disc-shaped slice of a silicon ingot (and more exotic materials these days) and then successively coated, exposed, and etched with solvents, while keeping the junctions protected by silicon oxide.
Sporck's departure from Fairchild to National may have ratified the notion - tentatively introduced when the Traitorous Eight left Shockley - that it was OK to leave a lucrative career in a good company and move on because, simply put, there are better things to do with one's life and professional career than simply being a satisfied employee.
National Semiconductor latched onto planar techniques just as its arch rival, Raytheon, which had been content to slavishly copy National's products and designs for years, retreated from passive components and moved into what it thought would be greener valleys. National Semiconductor found its métier, pushing Raytheon (which had bought the declining Rheem Semiconductor operations) completely out of the semiconductor industry, and began a decade-long chase to extend the 16000 family of microprocessors. As is the way of the semiconductor, the 16000 family is also in history's dustbin, but rethinking that 20 years later is armchair quarterbacking.
In looking at this 70-year-old, still tree trunk-like and physically imposing, one thinks Sporck should have managed to push National Semiconductor over the top. He clearly had a feeling for the technology and was always at the head of industry wide issues. Sporck looked forward for the country as well as the industry. In retrospect, one wonders if it was the people or the lack of talent that prevented the company from beating Intel. Or perhaps it was just the sheer cussedness of Sporck's determination that somehow jinxed National Semiconductor as a contender. On the other hand, looking at National's new campus and growth, despite the microprocessor recession of today, it's clear that much of the infrastructure laid down under Sporck's reign still pushes the company along.
When Sporck left Fairchild Semiconductor, he took quite a group with him: Lamond; Fred Bialek; Floyd Kvamme; Don Valentine, who joined later; and Roger Smullen, who had joined Fairchild, as employee number 853, the same day as Sporck. Smullen started out at Fairchild as an entry-level engineer, fresh out of the University of Minnesota with a degree in mechanical engineering. Hired on at the princely salary of $540 per month, Smullen started in quality assurance, becoming a foreman in the wafer fab within eight months, under Lamond. Smullen was one of the first group of semiconductor engineers who attended the "Fairchild University" classes taught by Hoerni, Grove, Moore and Noyce. By studying under the men who had made up the techniques, Smullen learned how to do his job better, and he quickly moved up to manufacturing foreman and then to process engineer, under Sporck.
Smullen looks back on the Fairchild Semiconductor era and explains his and others' departures simply: "I got one share of stock as my reward for eight years of work, at an option price of $200 for the share. It was clear that these [Fairchild management] guys weren't going to share the wealth of what we were building." So, when Lamond asked Smullen to come to National Semiconductor and run the digital circuit group, he left, spending four years at National, where there was a distribution of shares.
By 1971, Hoerni, in his third startup since leaving Fairchild, invited an increasingly well-known Smullen to run the digital memories division of the newly united Intersil and AMS companies, building RAM cards for IBM mainframes. Smullen worked with Jack Gifford, who ran the analog division of Intersil, before leaving Intersil in 1979 to take some time off. Smullen then joined Franklin "Pitch" Johnson in helping to revive Applied Micro Circuits Corporation (AMCC), a San Diego-based bipolar manufacturer that has since helped breath life into, and also benefited from, the return of bipolar technology for digital telephony. Clearly, Sporck had chosen well in hiring Smullen, and, just as clearly, Sporck had been right in abandoning Fairchild Semiconductor.
During the time between Sporck's departure from Fairchild to take over at National and Noyce and Moore leaving to found Intel, Fairchild found itself largely leaderless. It's too simple of a telling, but essentially true, that the manager of arch rival Motorola's semiconductor division, Lester Hogan, was chosen to run Fairchild; Darth Vader was invited into the company and shown all of its secrets. Rather than saving the company, many felt Hogan betrayed it. That was the downfall of Fairchild Semiconductor as the industry leader, and, although Fairchild is successful today, it is a largely reborn company, after two tortuous decades. Included in those two decades is yet another saga, National Semiconductor's acquisition and sale of Fairchild, but moving on to that story would force us to ignore the story of others at Fairchild, such as Wilfred Corrigan.
For a brief time, Corrigan, the eventual founder of LSI Logic, Jerry Sanders, the eventual founder of AMD, and others worked together under Hogan at Fairchild. Corrigan was a classically trained chemist, and chemists were greatly needed in the early days of semiconductors. He had worked in Boston at Transitron - the second-largest manufacturer of semiconductors, after Texas Instruments, at that time - before he and his new Norwegian bride jumped on a plane to Phoenix. Corrigan worked for Motorola for eight years, becoming a senior manager of Motorola's semiconductor operation, and then Hogan selected Corrigan to go to California, where he and the other "heroes," as they were called, would attempt to save Fairchild Semiconductor. Corrigan is one of the unsung technologists, and a much-recognized CEO, who helped a nascent industry develop the basic techniques, materials, and processes for semiconductor-wafer manufacturing. His area of specialization was in the use of RF microwaves, and similar technologies, to turn solid materials into gases and deposit them on ultra thin layers once again as solids, over the surface of photo masks that covered the wafers to produce the "integration of circuits."
Every semiconductor manufacturer in the late 1960s was fully integrated: grew its own silicon or geranium ingots, designed and manufactured its own circuits, performed its own testing, and integrated circuits into packaging suitable for their end use. Corrigan recalls that he couldn't even buy the exotic liquid mixtures that he needed for the processes he was attempting to develop and make precise. Instead, he had to gather the raw materials and mix them together, somehow managing to live through all of the explosions that occurred in his development labs, although his arms are permanently scarred from his work. After years of work at Motorola, the end result was the creation of repeatable techniques that reliably produced products of remarkably high quality. Hence, Corrigan's invitation to join Fairchild and his eventual uplifting to president of the semiconductor division, until that division was sold to Schlumberger.
It seems like hyperbole, but you look at Corrigan and think that he is a cross between Thomas Edison (Corrigan has several patents in his name) and John D. Rockefeller (Corrigan helped make an industry and now has the wealth to demonstrate his record of accomplishments). From humble chemist to founder of a company that, 20 years later, has nearly $3 billion in revenue, he's still here - just like his colleague Jerry Sanders. If a movie were to be made about Silicon Valley, the Hollywood studios simply wouldn't know what to do with a character like Corrigan: a scientist, entrepreneur, businessman, and marketer, with his great breakthrough at LSI Logic. He was the first to attempt, and succeed at, a commercial business based on building full-custom integrated circuits for others at a time when the industry had different models. Corrigan had the knowledge and the gonads to attempt to change the basic rules of operating in an industry created and populated by giants. Compare him to Edison, and he blushes and says, "Nonsense." Still, there's a Bentley in the parking lot, and, today, thousands of companies can afford to design and build application-specific integrated circuits largely as a result of one modest man who thought he could change the rules.
Another Transitron alumnus and transplant to Silicon Valley's semiconductor industry, Robert Swanson, founded a company the same year as Corrigan. But Swanson's interim learning ground was at National Semiconductor with Sporck. Today, Corrigan's company, LSI Logic, sits across the street from Swanson's Linear Technologies. Trained as an industrial engineer, Swanson found his way into Transitron because of his knowledge of statistics. Transitron was making linear-analog products as well as transistors, but it really had no way to track what was happening with different batches of materials that were cooked at different temperatures and produced varying quantities of usable products. Swanson's job was to figure all that out and improve yields. The statistics he knew cold; the rest this still-garrulous, twinkling-eyed Irish son of Boston figured out on the job. In the process, he became the manager of entire manufacturing lines, then multiple product lines, and then entire factories. By the time he went to work for Sporck at National Semiconductor, Swanson was starting up factories in Scotland and Germany, and he later ran the linear product line at headquarters.
"Charlie sued me for seven years after I left. I guess he figured that National was the only company that was supposed to be in the linear business. It was the biggest piece of business, and I did take some of the brightest National guys out with me," Swanson recalls. However, Sporck had done much the same to Fairchild Semiconductor before Moore and Noyce left. Swanson watched as National Semiconductor entered the watch business, minicomputers, and every new business on the block, while his own division, and the old-fashioned analog devices like power amplifiers or rectifiers that his division produced, got little of the limelight. He left and, 20 years later, runs a $2 billion business he founded producing the same kinds of parts that he once built for National Semiconductor. No bones about it: Swanson, the most youthful 50-year-old that you can imagine, built a global company in the face of disbelief, but with the support of VCs like Don Valentine, Thomas Perkins, and others who put up the $4.5 million Swanson and his partners wanted for 30 percent of their nascent company. In speaking with Swanson, you know that he's a guy you'd like to go drinking with; in fact, he looks like he might be pretty good in a bar fight, too.
Today, Linear Technologies builds the products in your personal computer that take the power delivered by the battery and separate it out into the individual power voltages required by the keyboard, the hard drive, the display, the input/output channels, and everything else. This is pretty complicated stuff that is still done best by the analog products that Linear Technologies sells around the world.
The final stellar graduate of the original semiconductor companies is the now more mature-looking T.J. Rodgers. In 1981, on the day after Linear Technologies' IPO, Rodgers' Cypress Semiconductor went public, with Morgan Stanley as the lead banker. Talk about a lack of coincidence; talk about a self-made man. Speaking of which, this man can talk. When he starts talking, after a while - when you get past the in-your-face presentation and the "I have an opinion on almost everything" personality - you hear the story of a young football player for Dartmouth College who was too smart to remain a jock and who came to Stanford University to earn a master's degree and a Ph.D. in electrical engineering. Rodgers also remembers William Shockley, who was Rodgers' professor at Stanford - the kind of professor who would invite his graduate students up to the blackboard to outline an answer to his question, let them write away for half a class, and then tell them how stupid they were. Tell Rodgers that he's a little like Shockley, and he won't disagree. He probably even likes the comparison in some ways. It's Shockley's brusqueness, forthrightness, intelligence, and impatience that he shares, and not Shockley's inability to lead or manage.
Rodgers was interested in a new form of MOS technology, VMOS, which promised to provide some significant advantages to semiconductor products. American Microsystems spotted Rodgers' dissertation, bought the patent on his VMOS idea, and hired him to boot. Rodgers spent the next five years discovering why VMOS was a dead end - lessons that he calls his MBA. The Rodgers went to work for Sanders at AMD. Thinking about these two men at one company presents some amusing images. Still, you can see that Rodgers would have contributed mightily to Sanders's success with AMD. But, like Corrigan and Swanson, Rodgers was destined to run his own show. Rodgers builds, as he proudly points out, static RAMs, the product business that Intel largely abandoned to the competition around 1984. If you could ever get this guy to shut up, you'd maybe tell him you think he's one of the smartest sons of a bitch you've ever met - and, in the context of this issue, that's saying something - but he's not about to give you the chance. Instead, Rodgers tells you he hates ass-kissers and is a reluctant republican, and then he shoves a copy of his latest ass-chewing memo to the company's engineers, regarding a recent mistake, under your nose.
We started this story about semiconductors with Moore, Noyce and Last, wondering about the odd, boyish enthusiasm that is still visible 30 years later. The story of Marcian Edward "Ted" Hoff and the making of the first microprocessor, the Intel 4004, is similar.
"Him, oh, he's some marketing guy," one person said to me, making me immediately think of William Davidow and preparing me to discover a young superachiever with a bachelor's, a master's, and a doctorate in electrical engineering, with an emphasis in what we have come to call artificial intelligence. Hoff was employee 12 at Intel, where he remained for what would be a wide and rich career for some, but was just the beginning for a self-admitted 60-year-old inventor who keeps lasers and other technical wonders in his basement.
If Noyce was the grand old man, Moore the technical resource, and Vadasz the semiconductor wizard, then Hoff was the local postdoc, hired straight out of the labs at Stanford University, who was going to settle onto a workbench and make stuff happen. Hoff figured out how to push beyond the bipolar technology and products mandated by Noyce and into CMOS. And, by burying himself in the circuit lines and logic equivalencies of the semiconductors, he figured out that there were many different parts that Intel and other companies were designing and manufacturing that could be combined to make a device that served many general-purpose functions. This device became known as the microprocessor and, more specifically, the Intel 4004 and then the Intel 8008 microprocessors. What kind of man is capable of pushing a company full of already-acclaimed geniuses into further achievements?
As you wander through a rambling conversation with Hoff, he is more interested in pointing out all of the individuals who did this or that work: how Federico Faggin's appearance at Intel made the microprocessor that he imagined possible and how the guy at the next workbench, Dov Frohman, invented the erasable programmable read-only memory, and introduced the concept of upgrading semiconductors once they left the factory. Bemoan the loss of the old Silicon Valley and the wonderful old places where you could push through dusty bins of spare parts and components - the kind of places that fired up a later generation of young inventors, like Steve Wozniak - and Hoff puts you straight, rattling off a list of such places and their locations. He then tells you which place has what kind of parts before going into a diatribe about how the big argon laser that he bought at one of these places eats up a bunch of power and he can get one with what he is really interested in. At 65 years of age, Hoff is as much of a "Hardy Boy" today as he was at 20, and he probably will be until they put him in a box. Then we'll only have a few recollections of this kind of man, yet another of the special people who make Silicon Valley a land of dreams.
Hoff was managing a group at Intel when he hired a young Federico Faggin, straight from Italy with a doctorate in solid-state physics. According to Faggin, on his first day at Intel, an engineer from Japan Business Systems showed up and asked him about the product that he was building. When Faggin tried to explain that he was new to Intel, the Japanese representative flew into a tirade, telling him, "You bad," among other choice "jinglish" criticisms. After three days of tirades, Faggin convinced Masatoshi Shima, the Japanese representative, that he would design the custom circuit that the company had contracted with Intel to build, but he had to have a fair chance. So began a long-standing collaboration between Shima and Faggin, who would later hire Shima to work with him when he founded Zilog. Shima helped Faggin design the Z-80, the world's most produced microprocessor, which is still under license and being built today, but that's a story for another time.
When these two stood facing each other at Intel, Shima had the logic design for a chip that was to be included in a new calculator that Intel was supporting by replacing a handful of discrete-logic parts with a single chip. Faggin recalls that Noyce, Grove, and Vadasz were "all out worrying about memories. Intel was a memory company at that time, and the competition was thick. This full-custom thing was a side project for them; they were worrying about how to [recover] from a huge and recent failure in memories. This single-chip computer project wasn't even on their radar. They weren't concerned with it in the least. So I had to design and build the thing. Shima knew what functions he wanted in the calculator, and he had logic diagrams from the company. I had to figure out how to put that in silicon."
It's a long and convoluted story, but Faggin succeeded in building what was to become the first mass-production microprocessor at Intel. However, it was not until Japan Business Systems went into financial difficulties and released Intel from exclusive production limitations on the product that Faggin began to try to drag the Intel executives' attention toward what he had just created: the first microprocessor. "They just didn't get it," Faggin says. Well, they got it enough to allow Faggin to push ahead and design and develop the Intel 8008, a precursor to the current generation of microprocessors that is Intel's claim to fame, but it wasn't enough to keep a frustrated Faggin motivated. He left Intel, taking Shima and a young Ralph Ungermann (who later found the first Ethernet company) with him to Zilog, where they built the first microprocessor used widely in personal computers.
The semiconductor industry is rife with stories like this, and this is only a very truncated version of the tale. Still, if the Nobel Prize committee, in its wisdom, should decide to award a prize for a little piece of revolutionary silicon, Hoff - who, Faggin says, is the only person at Intel who supported his ideas and work, the only manager who "got it" - and Faggin would probably be named.
But, before we leave the semiconductor industry in the early '80s, let's spend a few moments with one other leader - a young man who grew up with 10 brothers and sisters in the cornfields of Indiana; attended the local technical university; graduated with a degree in electrical engineering; entered the U.S. Navy before the war had ended, but too late to fight; and started his first career at RCA. Bernard Vonderschmidtt was one of the early employees at RCA's solid-state division, during the company's heyday, and was elevated to run the division when it was making $500 million per year. Given his life and career thus far, building a hugely successful semiconductor division with a multinational company on the East Coast, Vonderschmidtt may not, at first glance, seem to belong in this pantheon of West Coast heroes. But allow me to explain.
Vonderschmidtt came to California in 1981 to run Zilog for Exxon, which had provided its founding capitalization. He stayed for three years before leaving, in disgust, as Exxon imploded in the computer field. One of the company's engineers, Ross Freeman, left with Vonderschmidt, and, together, they raised $4.25 million from John Doerr and several of Doerr's contacts. With that money, Vonderschmidtt and Freeman founded a new kind of semiconductor company called Xilinx, based upon the premise that the design of the microprocessor - or, more specifically, the logic employed by a designer in a chip's configuration - could be customized, as done with a full-custom chip (the freedom first given to designers by Corrigan and LSI Logic), but through the use of a common substrate of semiconductor product, more accurately referred to as a field-programmable gate array. In short, the designer takes logic-design software from Xilinx, applies a design to a base chip (the gate array), and programs the design onto a chip in a matter or days.
Similarly, the test function that often proves a full-custom design process has erred in some way is reduced to a matter of hours. In effect, the semiconductor revolution evolved into microprocessor, and, at Xilinx, the microprocessor has seemed to evolve to a stage where the customer, not the semiconductor company, determines to what use the silicon will be put. Today, Vonderschmidtt's company, which started with 600 gates (logic operations) on a chip, is about to produce gate arrays with 10 million transistors on a single chip. The company's four buildings, housing 2,500 employees, seem impervious to the current downturn faced by the general-purpose microprocessor-based companies, because the design of the microprocessor, according to Vonderschmidtt, is finally moving into the hands of those who will drive its future: the customers. It's an odd way to end this discussion of the microprocessor industry, thinking that the industry is about to change dramatically. But, after talking with the people in this story, you can well imagine that this is an industry likely to be reborn from within.
Bell Labs, as the research arm for the Bell companies - owners of millions of electromechanical relays across the nation used in its telephone switching networks - was one of the most interested parties in semiconductors and their ability to conduct electrical currents. Bell executives had the foresight to hope that, one day, Bell could replace its troublesome relays with more reliable devices made of semiconductors. Bell had also laid underwater cables that used vacuum tubes for repeaters at regular intervals, making the cables unreliable. So Bell funded a semiconductor laboratory in Murray Hill, N.J., which is where Shockley, Walter Brattain, and John Bardeen produced the work that received the Nobel Prize in 1956 "for their researches on semiconductors and their discovery of the transistor effect."
As the head of one of the country's leading scientific companies, Beckman understood the importance of semiconductors. Hence, he hired the greatest name in the industry to establish his company in that field, setting Shockley up in his own research and development facility. Although Beckman Instruments was based in Los Angeles, Shockley's new labs were set up near Palo Alto, CA, because Shockley's mother lived there.
The Shockley Semiconductor Labs were short-lived, however. With the exception of Robert Noyce, none of the key engineers working there could stomach Shockley for long, despite his unquestionable technical brilliance. In 1957, the labs' senior members selected Gordon Moore to contact Beckman and have Shockley moved aside as leader of the labs. When that didn't work, seven men - and eventually Noyce, making it eight - left the company. Moore still remembers the night he drove to Jean Hoerni's house to make the call to Beckman and also that it did little good.
In the end, Shockley may be most remembered for hiring the talented group and, some say, subsequently driving them away to join Fairchild Semiconductor. Moore, one of the "Traitorous Eight" who left to form Fairchild's semiconductor operation and eventually become one of Intel's founders, remembers the evening he was sitting at home in Maryland, when the phone rang, and the voice on the other end said, "This is Shockley." That's about all I remember about the call, but I took the job he offered. I had been doing pretty much esoteric work at Johns Hopkins University, looking at the spectroscopy of metals. I didn't know the first thing about semiconductors, but Shockley thought he needed a chemist. None of us knew his reputation as a manager at that time, but maybe we should have suspected, as none of his guys from Bell Labs were joining him in California." The son of a local policeman in the small coastal town of Pescadero, CA - directly west of what would become Silicon Valley - Moore wanted to return to California. Shockley's reputation and the incredible wage being offered, $750 a month, were all it took to bring Moore home, where he became one of the formative members of the group that would eventually make Santa Clara, CA, "Silicon Valley."
By the time Moore was on his way to California, commercial semiconductor manufacturing was underway in Boston, Phoenix, Dallas, and New Jersey. The establishment of the Shockley Semiconductor Labs was the first step toward adding the Bay area to that list. Many books have been written about the semiconductor industry's founding, with Charlie Sporck's book excerpted in our August issue as one of the few firsthand accounts (see "The Birth of Fairchild Semiconductor," August 2001, page 60). Trying to capture the semiconductor story for this issue of Upside meant tracking down the people who created the semiconductor industry - a nerve-wracking process. Noyce, eulogized in Upside (July 1990), was one of the first of his generation to pass away. But many of the other larger-than-life people from Fairchild Semiconductor - Eugene Kleiner, Jay Last, Pierre Lamond, Julius Blank, Andrew Grove, and Moore - are still around to provide insight into what it was like when the semiconductor industry was first being created. For this special issue, I particularly wanted to answer the question of whether such a technological discontinuity as the semiconductor revolution will ever appear again. The answer lies in a thorough understanding of how the Valley became "siliconized."
Just as Shockley knew the labs would need chemists, he knew that mechanical engineers would be required, so he hired two: Blank and Kleiner. Blank was a classic engineer and had worked at Babcock & Wilcox, where he designed and built the huge boilers used in power plants and utility companies. As a boy, Blank attended a technical high school in Brooklyn, where he learned the craft of building things. In 1943, the U.S. Army grabbed the young man, sent him to college, had him repair military aircraft, and then sent him to Europe to fight in World War II battles such as the Battle of Hurtgen Forest. By the time Blank returned to the States in 1946 to finish his bachelor's degree in mechanical engineering, he already had a lifetime's worth of practical experience. Then it was off to Babcock & Wilcox, Goodyear Aircraft, and, finally, Western Electric, which set him to work with germanium phototransistors, among other devices, to figure out how to replace its mechanical relays.
In 1956, Dean Knapic, a Western Electric alumnus, offered Blank a job at Shockley Semiconductor Labs. After traveling to Palo Alto to be interviewed by Shockley, Blank, like all the other original employees, underwent lengthy psychological testing - possibly an artifact of Arnold Beckman's experience in one of his firm's plants in Los Angeles, where an employee went berserk and stabbed a co-worker to death, or a result of Shockley's unorthodox views on personnel practices. Despite the days-long grilling, $10,000 a year plus moving expenses looked pretty good.
Blank and Kleiner shared all of the mechanical-engineering work at the company, which was housed in a small stucco building at 391 South Charleston Road in Mountain View, CA (now a chair shop that bears an incongruous brass plaque identifying it as the birthplace of Silicon Valley).
Blank's first assignment was to build a crystal grower. Blank knew nothing about semiconductors. Fortunately, Leo Valdez and Victor Jones, hired by Shockley to actually grow the crystals, shared what they knew about the type of equipment they needed, and Blank went to work. "That's what it was like then. Bobby Noyce would walk in and say, 'I want you to melt some copper on this part.' Really vague instructions were the order of the day. I would do that, and then take it in to him. He'd look at it and tell me how to change it, or make some other suggestions, and we would go back and forth like that, making things up," Blank recalls.
Despite the lack of direction, Blank loved the work. After he joined Shockley Semiconductor Labs, Noyce, Moore, Last, Kleiner, and Hoerni appeared in short order. Blank remembers the group as a bunch of 20-somethings who liked to hang out together and see each other socially. He remembers the entire year and a half at Shockley Semiconductor Labs as an exciting time, ordering power upgrades, phone systems, air conditioners, and the radio-frequency (RF) oscillators needed to melt silicon. An indication of how Blank was regarded by his colleagues is the fact that Blank was nominated to recontact Beckman, after Moore's first attempt, about removing Shockley. "At first, it appeared I was successful," Blank says. Beckman endowed Shockley with a teaching chair at Stanford University that kept the good doctor out of the men's hair. Teaching, in addition to Shockley's speaking and travel demands after winning the Nobel Prize, initially seemed to have solved the issue. After a while, however, with Shockley coming back from trips and ordering entire projects restarted, it was clear that the problems would not be resolved. There was also Shockley's single-minded pursuit of the four-layer diode, perhaps left over from his days at Bell Labs, while many of the others thought silicon transistors were the direction they should be headed in.
Eugene Kleiner - co-founder, many years later, of the venture capital firm Kleiner Perkins - was another of Shockley's early hires. Kleiner was an immigrant from Europe. After leaving Vienna, Austria, he attended secondary school in New York. He then took work as a factory machinist, but, like so many of the remarkable men in this issue, he was drafted into the military. After the war, Kleiner earned a bachelor's degree from the Polytechnic University of New York and a master's in mechanical engineering from New York University. He taught engineering for a short while and then joined Western Electric, where he worked in the morass of the Bell system's relays and switches. Kleiner remembers Shockley as a charming person, a fascinating conversationalist, and, by reputation, one of the stars of Bell Labs.
Reconciling that impression of Shockley with the small, inadequate, and dirty building that Shockley had leased to start the company was the first of many events informing Kleiner that Shockley's technical brilliance was not matched by practical experience. Like Blank, Kleiner's first assignment was to build a crystal grower. It was this experience that brought Shockley down to earth in Kleiner's eyes. "I didn't know anything about growing crystals and [knew] nothing about furnaces. So I asked Shockley, but he didn't know. He just gave me advice, often the wrong advice, so our first device for growing crystals was a monstrosity. It didn't work. It was so large that we had to raise the roof of the building. It never worked. So I went next door to Sears, Roebuck and Co. and bought one of those large standing drill presses, and it had most of the features we needed. We had to change some things and add some things, but it formed the basis of our second and successful, crystal grower."
Then it was time to build a furnace, which entailed a similarly unsuccessful set of experiences. Still, "working with that team of men, Moore figured out the dispersal of gaseous materials," Kleiner recalls. (Moore was an expert glassblower. He actually created, by hand, the tube jungles in which gases were distributed, separated, and combined, thus allowing for single-step production of doubly diffused transistors.) "Knapic. Blank. It was a beautiful team. It was exciting," Kleiner continues. Once built, the furnace had to be kept on 24 hours a day. Kleiner and Blank, who lived close to the company, came in every couple of hours during weekends to check on the relatively delicate device. Kleiner remembers, 40 years later, that it was his wife who kept him going during those times (she also sang madrigals with Noyce at parties and social events). More importantly, she wrote a letter to Hayden, Stone & Co. seeking money for several of the "Fairchild Eight" - the letter that found its way to Arthur Rock and convinced Rock to find funding for Fairchild Semiconductor and, later, Teledyne Semiconductor and Intel. It was "one of the great letters of all time," Kleiner muses, thinking of that lovely unsung heroine.
Jay Last, now retired and living in Los Angeles, left Silicon Valley early on to become a vice president at Teledyne, where he helped Henry Singleton build that company from a single division to over 150 divisions. Last, a quiet electronics and optical engineer, worked closely with Noyce, and is responsible for much of the early manufacturing infrastructure of semiconductor technology. Surrounded by his collection of African art and the products of his publishing company, Last is, in many ways, uncomfortable sharing his life with strangers. His years of military research and development have remained a closed book long after his retirement. And the subject of Shockley is one that, despite the passage of 40 years, is not casually remembered.
Still, if you catch his attention, Last will explain that much of what helped build the semiconductor industry came out of Fairchild Semiconductor: improvements in growing silicon ingots and diffusing exotic materials across the substrate of silicon wafers. Last's own contributions from optical science - the creation of photographic masks that were used to expose patterns on the substrates and the development of etching processes through which lines and connections were created on the wafers in miniature - are tossed off casually. "None of that had been done. We were inventing everything," Last says. This includes, most notably, adapting these processes to wafer fabrication and manufacturing. Waving his hands, Last dismisses the greatest revolution in manufacturing since Henry Ford's achievements, but it was Last's special contribution: "the creation of step-and-repeat methods by ganging up these microscopes and devices on mechanically operated stages, so that we could create integrated circuits cheaply, quickly, and reliably." He holds out one of the first commercially integrated circuits, with its five gold leads, showing me the four-transistor device with a sense of wonderment, even after all these years.
"And this," he says, retrieving yet another device from a trove of first technologies. I notice a tiny "open here" legend printed on its side. Last smiles conspiratorially and says, "We knew that the people at TI were desperate to see what we were doing, and we knew that, as soon as we released these, they would get some, so I had these printed up for them." He grins at his one-upmanship with boyish delight.
He won't say it, but those processes, step and repeat, led to "batch manufacturing," which spread out of semiconductor manufacturing and into other technological fields, such as LED manufacturing, biotechnology, and, experimentally, nanotechnology, fostering a worldwide change in manufacturing technologies that will continue throughout the 21st century. Last is sanguine, comfortable with his accomplishments and a hoard of unmentioned patents. I sit pondering this guarded, gentle, and brilliant man who tells me that, despite the passage of four decades, he can walk into a modern-day wafer-fabrication facility and still know what the machines do, which is basically what he and his colleagues first laid down in the 1950s. Last thinks back on Noyce, his closest collaborator at Fairchild Semiconductor, with a fondness that is touching - an almost universal emotion among the giants still walking the Earth who helped to create Silicon Valley.
While the men were in a quandary over their problems with Shockley, there were other companies working with semiconductors. Boston-based Transitron Electronic was a contemporary of the Shockley Semiconductor Labs. Transitron was found by an eccentric pair of brothers named David and Leo Bakalar. One of the pair ran a shoe factory and was cheaper than blue jeans; the other was a Ph.D. who had worked at Bell Labs on transistor research. They recruited engineers to their firm by traveling through Europe and conducting interviews in major cities. They hired the brightest immigrants they could find, brought them to the United States, and worked them silly in the early days of discrete electronics components. Pierre Lamond, Wilfred Corrigan, Robert Swanson, Lester Hogan, and a young Hungarian immigrant named Leslie Vadasz passed through Transitron's doors and built a semiconductor company that vied with Texas Instruments for the number one position in the nation in the late 1950s. At that time, semiconductors like germanium were employed to produce devices such as rectifiers in small aluminum canisters, which electronics manufacturers used by the thousands.
Pierre Lamond, a jeweler's son who fought in the Algerian War and made contacts with American officers during a stint at NATO headquarters, wanted to find a way to work in the United States. It was clear that his field (physics and electron optics) was moving fastest in America. In 1957, a decommissioned Lamond saw an employment ad in the New York Times for Transitron. David Bakalar offered him a job on one of his recruiting trips through Paris. To get Lamond started, the Bakalars put him on the production line. In his third week, he was promoted to the head of production to replace his departing boss, and, in a few more months, he was promoted to device development engineer. It was a whirlwind introduction to semiconductor technology, and, for the one-year duration of his working visa, he absorbed everything that he could before returning to France. Lamond shopped for a company in his native country where he could apply his skills, but he found nothing comparable to his experience in Boston, so, by 1959, he was back at Transitron as the head of development.
Lamond's stint at Transitron was a short one, as most were. The Bakalars' approach was to "second source" parts designed by others (a polite way to describe their energetic copying of other people's products), which they would then sell to customers at cheaper prices. Lamond had heard of Hoerni's work at Fairchild Semiconductor in developing what would become known as the planar process of manufacturing semiconductor products. Lamond approached the Bakalars and told them that, if they were to compete, it was time for Transitron to invest in planar manufacturing, but they would have nothing of it, telling him to wait a few months until all the bugs were worked out of the process. Unfortunately for the Bakalars, the energetic Lamond had befriended Moore while presenting a paper at a technical conference, so the brothers' refusal to move Transitron along the path to original-product development came at a time when Fairchild Semiconductor's human resources manager was already courting Lamond.
In 1961, Lamond joined Fairchild Semiconductor, working for Moore. After one of the periodic diasporas of Fairchild's engineers to form a new company - in this case Signetics - and the loss of Lamond's direct supervisor, he was again promoted to lead device development. He remained at Fairchild from 1961 until 1967, when he became a member of another group leaving Fairchild, under Charlie Sporck, to restart National Semiconductor. Lamond remained with National until 1974.
Many of the Transitron staff passed through Phoenix (Motorola) or Dallas (Texas Instruments) before coming to Silicon Valley. Vadasz spent his three years of apprenticeship at Transitron, for $650 a month, before moving straight to Silicon Valley, where the man who had hired him into Transistron, Lamond, hired him again at Fairchild. As with others at Transitron, Vadasz found himself building whatever he needed. Need vacuum chambers to distribute evaporated dopants? Build them yourself, out of a piece of tube. Need some silicon wafers? Build your own furnace; dump in chunks of silicon lumps; start it spinning; dip in a piece of seed crystal, rotating it in opposite directions; pull it out slowly; and hope for the best. Everything else pretty much required working under a microscope with instruments held in your own shaking hands. Everybody who passed through the Boston sweatshop seems to have come out the better for having been there, and for having left.
For example, Wilfred Corrigan remembers someone from Transitron coming into a room, where he was reading about semiconductors, and telling him that the production line was a mess: "They told me to get out there and get it running right, so I went, and I figured out semiconductors later." Transitron was that kind of place.
Fairchild Semiconductor was, by comparison, a fortress of strong organization. Imagine coming into a company where at least a dozen future semiconductor company presidents and founders are working. At the head of the organization is Sherman Fairchild, founder of Fairchild Camera and Instrument, scion of one of the first investors in IBM, and head of a company with technology interests in multiple industries. A large part of the comparative stability at Fairchild Semiconductor was based upon its hiring of Ed Baldwin as general manager of its new semiconductor division. Baldwin recalls, "I came up from Los Angeles, and they interviewed me - all of the them, Noyce, Moore, [Victor] Grinich, and Last - but it was Moore that made the decision to hire me."
Their choice was for someone as eclectic as themselves. Baldwin's father was an itinerant intellectual: a musician, engineer, and writer. His father was related to a former prime minister of England, where his family hailed from, and the founder of a technical university that still exists in London today. Baldwin earned one of Carnegie Mellon University's first master's degrees in solid-state physics and then a Ph.D. in nuclear physics, also from Carnegie Mellon, where he worked in neutron and proton scattering. Baldwin also built Carnegie Mellon's synchro-cyclotron, one of the progeny devices of the Berkeley cyclotron.
In 1950, the young scientist was recruited by Hughes Semiconductors, of Los Angeles, during that company's heyday. There, Baldwin worked with people such as Simon Ramo and Dean Woolridge, two of the founders of TRW, on the miniature diodes Hughes produced for airborne computers. By 1956, Baldwin had risen to the head of product development in Hughes' computer division, and, when that was folded, he became head of product development for the semiconductor division. While at Hughes, Baldwin wrote his first two patents for the company. The first patent was on semiconductor photodiodes, and the second patent was for a device that would use the diodes to read hundreds of mainframe punch cards per minute. The company promptly gave him a $100 bonus, patted him on the head, and sold his division to RCA for a small fortune. At that point, Baldwin was ready for a career change.
Baldwin remembers Hughes as a great training ground where he learned about operations, plant maintenance, engineering, manufacturing, personnel, and research and development. At Hughes, Baldwin also learned how to work with brilliant technologists and how to act as a professional manager. Nevertheless, an ad in the Wall Street Journal, seeking an executive and a general manager for a startup in Northern California, caught his eye. Baldwin had been looking for new work for a while, and, along the way, he'd befriended a banker who knew a source of capital for Baldwin's possible own company. But Baldwin hadn't heard from the banker in months, and the offer to work with the likes of Hoerni and Moore proved irresistible.
Baldwin had been at Fairchild Semiconductor for several months when the banker turned up, having secured a commitment from a wealthy industrial-manufacturing family by the name of Rheem. The banker was ready to press a check for $5 million into Baldwin's hands. "It was the worst decision of my life. If I hadn't made [that decision] I would probably be at Intel today," he says, looking wistful, and then he smiles and starts telling the story of a lifetime's worth of companies he has started and run. Baldwin reminds me that, at one point, an engineer who left Fairchild Semiconductor to join him at Rheem Semiconductor took one of Fairchild's precious "recipe books" - a source of considerable disgruntlement to this day. Baldwin recalls, "When I found out about it, I gave him the living daylights, and I returned the book." Today, at a spry 82 years of age, Baldwin is running a startup in San Diego, Energy Development Systems, where he will be working in his field "until the day I die," having just earned the most recent of several patents on the high-power capacitors that fuel his dreams for tomorrow.
While Baldwin was departing to found Rheem Semiconductor, Vadasz was in the midst of four years of work putting down deep roots into the development of bipolar, and later MOS, semiconductor products. But Vadasz was also destined to leave Fairchild Semiconductor, and was hired by Noyce and Moore to work in research at Intel, the company Noyce and Moore founded with the intent of designing and building semiconductor memories. There was a growing market for semiconductor components, but Noyce and Moore felt that, if they could build solid-state, or thin-film, memories that would replace expensive and hard-to-manufacture solid-core memories, they would have ready customers among mainframe computer companies. It was a dubious market strategy at best, fraught with tough competition and only occasionally won by Intel. U.S. manufacturers ultimately abandoned the strategy and left memory making to Asian manufacturers.
Despite a well-published error having to do with a numbering scheme introduced much later, Noyce and Moore hired Grove and then Vadasz as their first Intel employees. Both Vadasz and Grove remain at Intel today. Ask Vadasz what he did in the beginning at Intel, and he'll explain that he worked on the technologies that led Intel into MOS manufacturing, the technique that is standard today. He goes on to admit that Intel's first successful memory products were good old-fashioned bipolar ones, like those of Fairchild Semiconductor. Press him for some details on the success he has brought Intel, and he'll tell you that it was Moore and others experimenting in the labs with MOS who finally figured out why the yields in the new technology were so low for Intel and made the process practical.
Out in the dry plains of Texas, Texas Instruments (TI) had been around since 1933, under another name, supporting the scientists working in the oil industry of Texas and beyond. A Texan giant of a man, Jack Kilby, had returned from Illinois to his home state with a bachelor's degree in electrical engineering to work with the resistors, capacitors, and discrete-logic products of his time - basically to build the instruments that TI manufactured. The Iliac was just being built when Kilby graduated from college, but computing was firmly on the horizon, and Kilby increasingly turned his attention to germanium and then silicon, spending a lifetime in the semiconductor field, with a single company. Kilby can sit and preach the semiconductor bible from memory, because, at TI, he did what all of his competitors were doing elsewhere, slowly experimenting with semiconductor materials. He developed the design and manufacturing processes that allowed TI to "get there first," making TI the undisputed leader in transistor, and then semiconductor manufacturing.
There's a hard edge in the 90-year-old's clear blue eyes when you ask him about the industry back then. "We didn't share anything in those days. We were all competitors, in everything. We went to the ISSCC [International Solid State Circuits Conference] and announced our progress each year, but we said as little as possible beyond what we had done, and we certainly didn't tell anyone about our processes." Kilby, recently awarded a Nobel Prize for the invention of the integrated circuit at TI, doesn't talk much about his or TI's primacy in the field; he seems proud just to have been a part of the efforts in building one of the first multitransistor semiconductor microprocessors - a six-transistor part that TI built for use in products such as portable calculators and the Minuteman program. Kilby knows all the names from the Valley - Moore, Sporck, and others - and has only praise to offer them and their work. Still, it seems as though his eyes burn bright, like fanned embers, when he remembers the competition of the time.
Awarding Kilby with the Nobel Prize for the invention of the integrated circuit is a touchy subject. No one has anything critical to say about Kilby, but a few people say that everyone knows that Noyce invented the integrated circuit. Still, the Nobel Prize - as was pointed out to me at least 10 times during the course of researching this article - is awarded only to living people; it's not awarded posthumously. So Kilby, who created an integrated circuit at about the same time as Noyce, ends up the sole winner. It's incongruous and a little bitter for everyone who loved Noyce, yet everyone is happy that the Nobel Prize committee finally recognized the achievement. It's one of those issues that makes people a little grumpy.
No account of the semiconductor industry would be complete without discussing Charlie Sporck, the creator, if not the founder, of National Semiconductor and the legendary head of manufacturing at Fairchild Semiconductor. He retains the same gruff attitude he has always had, but a hint of deep humor resides somewhere under the attitude. Despite getting on in years, Sporck is about half a generation behind many of the people in this story. Sporck was classically trained engineer manager out of the General Electric system when he joined Fairchild Semiconductor as employee number 854. He was a senior executive at Fairchild Semiconductor when the famous Eight were well on their way to creating a new industry, and he left the company just in time to take over a tiny manufacturer of passive electronics components and bend it toward the innovation that he identifies as the mother of all inventions: the planar process, the basic manufacturing technique that defined an industry. In a nutshell, planar processes are the methods by which successive layers of semiconductors and conductors are deposited on a disc-shaped slice of a silicon ingot (and more exotic materials these days) and then successively coated, exposed, and etched with solvents, while keeping the junctions protected by silicon oxide.
Sporck's departure from Fairchild to National may have ratified the notion - tentatively introduced when the Traitorous Eight left Shockley - that it was OK to leave a lucrative career in a good company and move on because, simply put, there are better things to do with one's life and professional career than simply being a satisfied employee.
National Semiconductor latched onto planar techniques just as its arch rival, Raytheon, which had been content to slavishly copy National's products and designs for years, retreated from passive components and moved into what it thought would be greener valleys. National Semiconductor found its métier, pushing Raytheon (which had bought the declining Rheem Semiconductor operations) completely out of the semiconductor industry, and began a decade-long chase to extend the 16000 family of microprocessors. As is the way of the semiconductor, the 16000 family is also in history's dustbin, but rethinking that 20 years later is armchair quarterbacking.
In looking at this 70-year-old, still tree trunk-like and physically imposing, one thinks Sporck should have managed to push National Semiconductor over the top. He clearly had a feeling for the technology and was always at the head of industry wide issues. Sporck looked forward for the country as well as the industry. In retrospect, one wonders if it was the people or the lack of talent that prevented the company from beating Intel. Or perhaps it was just the sheer cussedness of Sporck's determination that somehow jinxed National Semiconductor as a contender. On the other hand, looking at National's new campus and growth, despite the microprocessor recession of today, it's clear that much of the infrastructure laid down under Sporck's reign still pushes the company along.
When Sporck left Fairchild Semiconductor, he took quite a group with him: Lamond; Fred Bialek; Floyd Kvamme; Don Valentine, who joined later; and Roger Smullen, who had joined Fairchild, as employee number 853, the same day as Sporck. Smullen started out at Fairchild as an entry-level engineer, fresh out of the University of Minnesota with a degree in mechanical engineering. Hired on at the princely salary of $540 per month, Smullen started in quality assurance, becoming a foreman in the wafer fab within eight months, under Lamond. Smullen was one of the first group of semiconductor engineers who attended the "Fairchild University" classes taught by Hoerni, Grove, Moore and Noyce. By studying under the men who had made up the techniques, Smullen learned how to do his job better, and he quickly moved up to manufacturing foreman and then to process engineer, under Sporck.
Smullen looks back on the Fairchild Semiconductor era and explains his and others' departures simply: "I got one share of stock as my reward for eight years of work, at an option price of $200 for the share. It was clear that these [Fairchild management] guys weren't going to share the wealth of what we were building." So, when Lamond asked Smullen to come to National Semiconductor and run the digital circuit group, he left, spending four years at National, where there was a distribution of shares.
By 1971, Hoerni, in his third startup since leaving Fairchild, invited an increasingly well-known Smullen to run the digital memories division of the newly united Intersil and AMS companies, building RAM cards for IBM mainframes. Smullen worked with Jack Gifford, who ran the analog division of Intersil, before leaving Intersil in 1979 to take some time off. Smullen then joined Franklin "Pitch" Johnson in helping to revive Applied Micro Circuits Corporation (AMCC), a San Diego-based bipolar manufacturer that has since helped breath life into, and also benefited from, the return of bipolar technology for digital telephony. Clearly, Sporck had chosen well in hiring Smullen, and, just as clearly, Sporck had been right in abandoning Fairchild Semiconductor.
During the time between Sporck's departure from Fairchild to take over at National and Noyce and Moore leaving to found Intel, Fairchild found itself largely leaderless. It's too simple of a telling, but essentially true, that the manager of arch rival Motorola's semiconductor division, Lester Hogan, was chosen to run Fairchild; Darth Vader was invited into the company and shown all of its secrets. Rather than saving the company, many felt Hogan betrayed it. That was the downfall of Fairchild Semiconductor as the industry leader, and, although Fairchild is successful today, it is a largely reborn company, after two tortuous decades. Included in those two decades is yet another saga, National Semiconductor's acquisition and sale of Fairchild, but moving on to that story would force us to ignore the story of others at Fairchild, such as Wilfred Corrigan.
For a brief time, Corrigan, the eventual founder of LSI Logic, Jerry Sanders, the eventual founder of AMD, and others worked together under Hogan at Fairchild. Corrigan was a classically trained chemist, and chemists were greatly needed in the early days of semiconductors. He had worked in Boston at Transitron - the second-largest manufacturer of semiconductors, after Texas Instruments, at that time - before he and his new Norwegian bride jumped on a plane to Phoenix. Corrigan worked for Motorola for eight years, becoming a senior manager of Motorola's semiconductor operation, and then Hogan selected Corrigan to go to California, where he and the other "heroes," as they were called, would attempt to save Fairchild Semiconductor. Corrigan is one of the unsung technologists, and a much-recognized CEO, who helped a nascent industry develop the basic techniques, materials, and processes for semiconductor-wafer manufacturing. His area of specialization was in the use of RF microwaves, and similar technologies, to turn solid materials into gases and deposit them on ultra thin layers once again as solids, over the surface of photo masks that covered the wafers to produce the "integration of circuits."
Every semiconductor manufacturer in the late 1960s was fully integrated: grew its own silicon or geranium ingots, designed and manufactured its own circuits, performed its own testing, and integrated circuits into packaging suitable for their end use. Corrigan recalls that he couldn't even buy the exotic liquid mixtures that he needed for the processes he was attempting to develop and make precise. Instead, he had to gather the raw materials and mix them together, somehow managing to live through all of the explosions that occurred in his development labs, although his arms are permanently scarred from his work. After years of work at Motorola, the end result was the creation of repeatable techniques that reliably produced products of remarkably high quality. Hence, Corrigan's invitation to join Fairchild and his eventual uplifting to president of the semiconductor division, until that division was sold to Schlumberger.
It seems like hyperbole, but you look at Corrigan and think that he is a cross between Thomas Edison (Corrigan has several patents in his name) and John D. Rockefeller (Corrigan helped make an industry and now has the wealth to demonstrate his record of accomplishments). From humble chemist to founder of a company that, 20 years later, has nearly $3 billion in revenue, he's still here - just like his colleague Jerry Sanders. If a movie were to be made about Silicon Valley, the Hollywood studios simply wouldn't know what to do with a character like Corrigan: a scientist, entrepreneur, businessman, and marketer, with his great breakthrough at LSI Logic. He was the first to attempt, and succeed at, a commercial business based on building full-custom integrated circuits for others at a time when the industry had different models. Corrigan had the knowledge and the gonads to attempt to change the basic rules of operating in an industry created and populated by giants. Compare him to Edison, and he blushes and says, "Nonsense." Still, there's a Bentley in the parking lot, and, today, thousands of companies can afford to design and build application-specific integrated circuits largely as a result of one modest man who thought he could change the rules.
Another Transitron alumnus and transplant to Silicon Valley's semiconductor industry, Robert Swanson, founded a company the same year as Corrigan. But Swanson's interim learning ground was at National Semiconductor with Sporck. Today, Corrigan's company, LSI Logic, sits across the street from Swanson's Linear Technologies. Trained as an industrial engineer, Swanson found his way into Transitron because of his knowledge of statistics. Transitron was making linear-analog products as well as transistors, but it really had no way to track what was happening with different batches of materials that were cooked at different temperatures and produced varying quantities of usable products. Swanson's job was to figure all that out and improve yields. The statistics he knew cold; the rest this still-garrulous, twinkling-eyed Irish son of Boston figured out on the job. In the process, he became the manager of entire manufacturing lines, then multiple product lines, and then entire factories. By the time he went to work for Sporck at National Semiconductor, Swanson was starting up factories in Scotland and Germany, and he later ran the linear product line at headquarters.
"Charlie sued me for seven years after I left. I guess he figured that National was the only company that was supposed to be in the linear business. It was the biggest piece of business, and I did take some of the brightest National guys out with me," Swanson recalls. However, Sporck had done much the same to Fairchild Semiconductor before Moore and Noyce left. Swanson watched as National Semiconductor entered the watch business, minicomputers, and every new business on the block, while his own division, and the old-fashioned analog devices like power amplifiers or rectifiers that his division produced, got little of the limelight. He left and, 20 years later, runs a $2 billion business he founded producing the same kinds of parts that he once built for National Semiconductor. No bones about it: Swanson, the most youthful 50-year-old that you can imagine, built a global company in the face of disbelief, but with the support of VCs like Don Valentine, Thomas Perkins, and others who put up the $4.5 million Swanson and his partners wanted for 30 percent of their nascent company. In speaking with Swanson, you know that he's a guy you'd like to go drinking with; in fact, he looks like he might be pretty good in a bar fight, too.
Today, Linear Technologies builds the products in your personal computer that take the power delivered by the battery and separate it out into the individual power voltages required by the keyboard, the hard drive, the display, the input/output channels, and everything else. This is pretty complicated stuff that is still done best by the analog products that Linear Technologies sells around the world.
The final stellar graduate of the original semiconductor companies is the now more mature-looking T.J. Rodgers. In 1981, on the day after Linear Technologies' IPO, Rodgers' Cypress Semiconductor went public, with Morgan Stanley as the lead banker. Talk about a lack of coincidence; talk about a self-made man. Speaking of which, this man can talk. When he starts talking, after a while - when you get past the in-your-face presentation and the "I have an opinion on almost everything" personality - you hear the story of a young football player for Dartmouth College who was too smart to remain a jock and who came to Stanford University to earn a master's degree and a Ph.D. in electrical engineering. Rodgers also remembers William Shockley, who was Rodgers' professor at Stanford - the kind of professor who would invite his graduate students up to the blackboard to outline an answer to his question, let them write away for half a class, and then tell them how stupid they were. Tell Rodgers that he's a little like Shockley, and he won't disagree. He probably even likes the comparison in some ways. It's Shockley's brusqueness, forthrightness, intelligence, and impatience that he shares, and not Shockley's inability to lead or manage.
Rodgers was interested in a new form of MOS technology, VMOS, which promised to provide some significant advantages to semiconductor products. American Microsystems spotted Rodgers' dissertation, bought the patent on his VMOS idea, and hired him to boot. Rodgers spent the next five years discovering why VMOS was a dead end - lessons that he calls his MBA. The Rodgers went to work for Sanders at AMD. Thinking about these two men at one company presents some amusing images. Still, you can see that Rodgers would have contributed mightily to Sanders's success with AMD. But, like Corrigan and Swanson, Rodgers was destined to run his own show. Rodgers builds, as he proudly points out, static RAMs, the product business that Intel largely abandoned to the competition around 1984. If you could ever get this guy to shut up, you'd maybe tell him you think he's one of the smartest sons of a bitch you've ever met - and, in the context of this issue, that's saying something - but he's not about to give you the chance. Instead, Rodgers tells you he hates ass-kissers and is a reluctant republican, and then he shoves a copy of his latest ass-chewing memo to the company's engineers, regarding a recent mistake, under your nose.
We started this story about semiconductors with Moore, Noyce and Last, wondering about the odd, boyish enthusiasm that is still visible 30 years later. The story of Marcian Edward "Ted" Hoff and the making of the first microprocessor, the Intel 4004, is similar.
"Him, oh, he's some marketing guy," one person said to me, making me immediately think of William Davidow and preparing me to discover a young superachiever with a bachelor's, a master's, and a doctorate in electrical engineering, with an emphasis in what we have come to call artificial intelligence. Hoff was employee 12 at Intel, where he remained for what would be a wide and rich career for some, but was just the beginning for a self-admitted 60-year-old inventor who keeps lasers and other technical wonders in his basement.
If Noyce was the grand old man, Moore the technical resource, and Vadasz the semiconductor wizard, then Hoff was the local postdoc, hired straight out of the labs at Stanford University, who was going to settle onto a workbench and make stuff happen. Hoff figured out how to push beyond the bipolar technology and products mandated by Noyce and into CMOS. And, by burying himself in the circuit lines and logic equivalencies of the semiconductors, he figured out that there were many different parts that Intel and other companies were designing and manufacturing that could be combined to make a device that served many general-purpose functions. This device became known as the microprocessor and, more specifically, the Intel 4004 and then the Intel 8008 microprocessors. What kind of man is capable of pushing a company full of already-acclaimed geniuses into further achievements?
As you wander through a rambling conversation with Hoff, he is more interested in pointing out all of the individuals who did this or that work: how Federico Faggin's appearance at Intel made the microprocessor that he imagined possible and how the guy at the next workbench, Dov Frohman, invented the erasable programmable read-only memory, and introduced the concept of upgrading semiconductors once they left the factory. Bemoan the loss of the old Silicon Valley and the wonderful old places where you could push through dusty bins of spare parts and components - the kind of places that fired up a later generation of young inventors, like Steve Wozniak - and Hoff puts you straight, rattling off a list of such places and their locations. He then tells you which place has what kind of parts before going into a diatribe about how the big argon laser that he bought at one of these places eats up a bunch of power and he can get one with what he is really interested in. At 65 years of age, Hoff is as much of a "Hardy Boy" today as he was at 20, and he probably will be until they put him in a box. Then we'll only have a few recollections of this kind of man, yet another of the special people who make Silicon Valley a land of dreams.
Hoff was managing a group at Intel when he hired a young Federico Faggin, straight from Italy with a doctorate in solid-state physics. According to Faggin, on his first day at Intel, an engineer from Japan Business Systems showed up and asked him about the product that he was building. When Faggin tried to explain that he was new to Intel, the Japanese representative flew into a tirade, telling him, "You bad," among other choice "jinglish" criticisms. After three days of tirades, Faggin convinced Masatoshi Shima, the Japanese representative, that he would design the custom circuit that the company had contracted with Intel to build, but he had to have a fair chance. So began a long-standing collaboration between Shima and Faggin, who would later hire Shima to work with him when he founded Zilog. Shima helped Faggin design the Z-80, the world's most produced microprocessor, which is still under license and being built today, but that's a story for another time.
When these two stood facing each other at Intel, Shima had the logic design for a chip that was to be included in a new calculator that Intel was supporting by replacing a handful of discrete-logic parts with a single chip. Faggin recalls that Noyce, Grove, and Vadasz were "all out worrying about memories. Intel was a memory company at that time, and the competition was thick. This full-custom thing was a side project for them; they were worrying about how to [recover] from a huge and recent failure in memories. This single-chip computer project wasn't even on their radar. They weren't concerned with it in the least. So I had to design and build the thing. Shima knew what functions he wanted in the calculator, and he had logic diagrams from the company. I had to figure out how to put that in silicon."
It's a long and convoluted story, but Faggin succeeded in building what was to become the first mass-production microprocessor at Intel. However, it was not until Japan Business Systems went into financial difficulties and released Intel from exclusive production limitations on the product that Faggin began to try to drag the Intel executives' attention toward what he had just created: the first microprocessor. "They just didn't get it," Faggin says. Well, they got it enough to allow Faggin to push ahead and design and develop the Intel 8008, a precursor to the current generation of microprocessors that is Intel's claim to fame, but it wasn't enough to keep a frustrated Faggin motivated. He left Intel, taking Shima and a young Ralph Ungermann (who later found the first Ethernet company) with him to Zilog, where they built the first microprocessor used widely in personal computers.
The semiconductor industry is rife with stories like this, and this is only a very truncated version of the tale. Still, if the Nobel Prize committee, in its wisdom, should decide to award a prize for a little piece of revolutionary silicon, Hoff - who, Faggin says, is the only person at Intel who supported his ideas and work, the only manager who "got it" - and Faggin would probably be named.
But, before we leave the semiconductor industry in the early '80s, let's spend a few moments with one other leader - a young man who grew up with 10 brothers and sisters in the cornfields of Indiana; attended the local technical university; graduated with a degree in electrical engineering; entered the U.S. Navy before the war had ended, but too late to fight; and started his first career at RCA. Bernard Vonderschmidtt was one of the early employees at RCA's solid-state division, during the company's heyday, and was elevated to run the division when it was making $500 million per year. Given his life and career thus far, building a hugely successful semiconductor division with a multinational company on the East Coast, Vonderschmidtt may not, at first glance, seem to belong in this pantheon of West Coast heroes. But allow me to explain.
Vonderschmidtt came to California in 1981 to run Zilog for Exxon, which had provided its founding capitalization. He stayed for three years before leaving, in disgust, as Exxon imploded in the computer field. One of the company's engineers, Ross Freeman, left with Vonderschmidt, and, together, they raised $4.25 million from John Doerr and several of Doerr's contacts. With that money, Vonderschmidtt and Freeman founded a new kind of semiconductor company called Xilinx, based upon the premise that the design of the microprocessor - or, more specifically, the logic employed by a designer in a chip's configuration - could be customized, as done with a full-custom chip (the freedom first given to designers by Corrigan and LSI Logic), but through the use of a common substrate of semiconductor product, more accurately referred to as a field-programmable gate array. In short, the designer takes logic-design software from Xilinx, applies a design to a base chip (the gate array), and programs the design onto a chip in a matter or days.
Similarly, the test function that often proves a full-custom design process has erred in some way is reduced to a matter of hours. In effect, the semiconductor revolution evolved into microprocessor, and, at Xilinx, the microprocessor has seemed to evolve to a stage where the customer, not the semiconductor company, determines to what use the silicon will be put. Today, Vonderschmidtt's company, which started with 600 gates (logic operations) on a chip, is about to produce gate arrays with 10 million transistors on a single chip. The company's four buildings, housing 2,500 employees, seem impervious to the current downturn faced by the general-purpose microprocessor-based companies, because the design of the microprocessor, according to Vonderschmidtt, is finally moving into the hands of those who will drive its future: the customers. It's an odd way to end this discussion of the microprocessor industry, thinking that the industry is about to change dramatically. But, after talking with the people in this story, you can well imagine that this is an industry likely to be reborn from within.
What Carly Will be Missing.
VCs are sitting on a boatload of uninvested cash that they simply must spend.
Usually I come up with my own column topics, but sometimes readers simply demand that I write about this or that. This week, the pull is coming from two different directions -- those who want a take on the Toshiba-Sony-IBM Cell Processor announced this week, and those who want my reaction to the firing of Carly Fiorina as CEO of Hewlett-Packard. These would seem to be very different topics, but if you stand far enough away and squint, they look nearly the same. The Cell Processor represents a technical revolution that is about to take place in high-tech business, while Carly Fiorina represents management that was poorly prepared to lead or even adapt to that revolution. It was a smart move to let her go, though the real test for HP's board will be finding a proper successor.
The technical revolution is coming for several reasons, most of them having nothing to do with technology. The economy is improving somewhat, both people and businesses are looking for new things to buy, and more of the same just won't do. We need whole new categories of products and services and they are on the way. Big IP-centric businesses like music, video, movies, and publishing sense that they are imperiled and are looking for new ways to stretch their old strengths. But most importantly, the VCs are sitting on a boatload of uninvested cash that they simply must spend. Get ready for a return to 1998 because soon you will be able to get funding for almost any hare-brained scheme. And while this process of throwing money at the wall is grossly inefficient, it inevitably leads to rapid change.
You may recall that I asked a year ago for venture capitalists, who weren't at that time funding much of anything, to start spending money if only to jump-start the economy. They didn't, of course. So why would they now start to fund every deal in sight? That's simply because their alternative is to give back the money and then some, which they will never do.
In 1999-2000 -- at the very peak of the dot-com boom -- venture capital firms were not only taking companies public at a furious pace, they were just as furiously raising new venture funds -- funds that will shortly be coming to the end of their lives. Throughout the fixed lifespan of these funds venture capitalists are typically paid 1-2 percent of the total fund per year as a management fee. If a VC raises $100 million for a fund with a six-year life, they'll take $2 million every year as a management fee, whether the money is actually invested or not. Any money that remains uninvested at the end of the fund must be returned to the investors ALONG WITH THE ASSOCIATED MANAGEMENT FEE.
Right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their lifespans in the next 12-18 months. If the VCs return those funds to investors they'll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money -- even if they invest it in bad deals -- and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion. They waited this long in hopes that the economy would improve and that technical trends would become clear so they could do their typical lemming-like jump off the same investment cliff as all the other VCs. Well, we're at the edge of the cliff, so get ready for the most furious venture investing cycle in history.
I'm not saying this is bad, but I do find it ironic.
Companies like Hewlett-Packard are in a great position to see in advance where technology is going. Some of it comes from their own labs, but most of it comes from small entrepreneurs who are looking for partnerships or investors. The venture division of every big company sees every deal. There are no secrets. So HP, just like IBM and Dell and Microsoft, has by this time a fairly good sense of what will probably be hot 12-18 months from now. But what HP didn't have was a technical vision giving it confidence to make the hard decisions about what to fund and what to kill to be best prepared for that semi-inevitable future. Carly Fiorina simply could not provide that vision. This was precisely the same problem that got John Sculley then Mike Spindler then Gil Amelio fired from Apple. Frankly, it is also what got Lew Platt fired from HP before Carly was hired.
This firing, just like the hiring that preceded it, has nothing to do with Carly Fiorina being a woman. This is just business and comes down to dollars and cents, not sexism.
Fiorina was a salesperson leading a company of engineers, yet not having any sense of the art of engineering. I'm not trying to portray Carly here as the bad guy and HP engineers as the good guys, because HP engineers haven't historically had any marketing sense AT ALL. It was just a bad hire. The company needed (and thought it was getting) a charismatic leader whose vision extended all the way from the lab to the marketplace. But what they actually hired was a very facile salesperson who came from a company that looked fabulously successful primarily by cooking the books (I wrote about this at the time -- it's among this week's links). Carly looked like she could walk on water because Lucent Technologies had been filled with helium.
Knowing she was not what she was claiming to be, Carly's management technique was to be charming and brutal, to throw HP through a succession of mergers and reorgs that kept any potential adversary from gaining a power base. Note that this week, there simply is no clear internal successor as CEO, nor is the company even thinking of looking inside because any talent there was run off long ago.
The big problem with running a company this way is that it always ends badly.
Now to the Cell Processor, which looks to be the poster child for the technical revolution that's beginning. The Cell is great, the Cell is powerful, the Cell is scalable, the Cell burns 130 watts. Don't look for a truly mobile Cell ANYTHING for at least three years.
And people who think because it will first appear in a video game means that the Cell is inexpensive are wrong. Two hundred twenty-three million transistors cost the same to produce no matter what they are being used for. Sony will just bury the cost of the Cell and try to make it up through game royalties.
Certainly the Cell will find its place in video games and in most types of computers. It will be for Intel and AMD the very kind of competition both those companies need and hate. As such, the Cell will be very good for consumers and for the market. But there is going to be a huge amount of confusion and many missteps before the Cell is broadly absorbed. This will be a transition roughly comparable to object-oriented computing and remember that took half a dozen difficult years. Until then, Cell will be one of those keywords that populate every high-tech business plan. This week, every PowerPoint stack is getting a new slide showing where the Cell Processor fits. And that includes at Apple, no matter what signals the company is trying to send to the contrary.
My recommendation to entrepreneurs is to quickly leverage the Cell buzzword. Propose the first Cell router, first Cell super-mega-ultracluster, first Cell database, first Cell printer, first Cell video camera. But do it in the next 7-10 days before someone else does.
Now back to the coming tech revolution. It must go beyond VCs hurling buckets of money out their windows on Sand Hill Rd. There must be demand, after all. And there is. The coming tech revolution comes down primarily to bandwidth -- leveraging the dark fiber that was stuffed underground in huge quantities five years ago to support communication services that weren't economically feasible at that time but we were all so stoked we didn't care. The companies that built those networks have departed for the most part but the fiber remains. And with the capital cost of that fiber having been absorbed through bankruptcies, the advent of new technologies for pumping even more photons down the line, and the inexorable force of Moore's Law, many of the things we thought we'd be doing in 1999 we'll actually be doing by late 2005.
The technical revolution is coming for several reasons, most of them having nothing to do with technology. The economy is improving somewhat, both people and businesses are looking for new things to buy, and more of the same just won't do. We need whole new categories of products and services and they are on the way. Big IP-centric businesses like music, video, movies, and publishing sense that they are imperiled and are looking for new ways to stretch their old strengths. But most importantly, the VCs are sitting on a boatload of uninvested cash that they simply must spend. Get ready for a return to 1998 because soon you will be able to get funding for almost any hare-brained scheme. And while this process of throwing money at the wall is grossly inefficient, it inevitably leads to rapid change.
You may recall that I asked a year ago for venture capitalists, who weren't at that time funding much of anything, to start spending money if only to jump-start the economy. They didn't, of course. So why would they now start to fund every deal in sight? That's simply because their alternative is to give back the money and then some, which they will never do.
In 1999-2000 -- at the very peak of the dot-com boom -- venture capital firms were not only taking companies public at a furious pace, they were just as furiously raising new venture funds -- funds that will shortly be coming to the end of their lives. Throughout the fixed lifespan of these funds venture capitalists are typically paid 1-2 percent of the total fund per year as a management fee. If a VC raises $100 million for a fund with a six-year life, they'll take $2 million every year as a management fee, whether the money is actually invested or not. Any money that remains uninvested at the end of the fund must be returned to the investors ALONG WITH THE ASSOCIATED MANAGEMENT FEE.
Right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their lifespans in the next 12-18 months. If the VCs return those funds to investors they'll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money -- even if they invest it in bad deals -- and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion. They waited this long in hopes that the economy would improve and that technical trends would become clear so they could do their typical lemming-like jump off the same investment cliff as all the other VCs. Well, we're at the edge of the cliff, so get ready for the most furious venture investing cycle in history.
I'm not saying this is bad, but I do find it ironic.
Companies like Hewlett-Packard are in a great position to see in advance where technology is going. Some of it comes from their own labs, but most of it comes from small entrepreneurs who are looking for partnerships or investors. The venture division of every big company sees every deal. There are no secrets. So HP, just like IBM and Dell and Microsoft, has by this time a fairly good sense of what will probably be hot 12-18 months from now. But what HP didn't have was a technical vision giving it confidence to make the hard decisions about what to fund and what to kill to be best prepared for that semi-inevitable future. Carly Fiorina simply could not provide that vision. This was precisely the same problem that got John Sculley then Mike Spindler then Gil Amelio fired from Apple. Frankly, it is also what got Lew Platt fired from HP before Carly was hired.
This firing, just like the hiring that preceded it, has nothing to do with Carly Fiorina being a woman. This is just business and comes down to dollars and cents, not sexism.
Fiorina was a salesperson leading a company of engineers, yet not having any sense of the art of engineering. I'm not trying to portray Carly here as the bad guy and HP engineers as the good guys, because HP engineers haven't historically had any marketing sense AT ALL. It was just a bad hire. The company needed (and thought it was getting) a charismatic leader whose vision extended all the way from the lab to the marketplace. But what they actually hired was a very facile salesperson who came from a company that looked fabulously successful primarily by cooking the books (I wrote about this at the time -- it's among this week's links). Carly looked like she could walk on water because Lucent Technologies had been filled with helium.
Knowing she was not what she was claiming to be, Carly's management technique was to be charming and brutal, to throw HP through a succession of mergers and reorgs that kept any potential adversary from gaining a power base. Note that this week, there simply is no clear internal successor as CEO, nor is the company even thinking of looking inside because any talent there was run off long ago.
The big problem with running a company this way is that it always ends badly.
Now to the Cell Processor, which looks to be the poster child for the technical revolution that's beginning. The Cell is great, the Cell is powerful, the Cell is scalable, the Cell burns 130 watts. Don't look for a truly mobile Cell ANYTHING for at least three years.
And people who think because it will first appear in a video game means that the Cell is inexpensive are wrong. Two hundred twenty-three million transistors cost the same to produce no matter what they are being used for. Sony will just bury the cost of the Cell and try to make it up through game royalties.
Certainly the Cell will find its place in video games and in most types of computers. It will be for Intel and AMD the very kind of competition both those companies need and hate. As such, the Cell will be very good for consumers and for the market. But there is going to be a huge amount of confusion and many missteps before the Cell is broadly absorbed. This will be a transition roughly comparable to object-oriented computing and remember that took half a dozen difficult years. Until then, Cell will be one of those keywords that populate every high-tech business plan. This week, every PowerPoint stack is getting a new slide showing where the Cell Processor fits. And that includes at Apple, no matter what signals the company is trying to send to the contrary.
My recommendation to entrepreneurs is to quickly leverage the Cell buzzword. Propose the first Cell router, first Cell super-mega-ultracluster, first Cell database, first Cell printer, first Cell video camera. But do it in the next 7-10 days before someone else does.
Now back to the coming tech revolution. It must go beyond VCs hurling buckets of money out their windows on Sand Hill Rd. There must be demand, after all. And there is. The coming tech revolution comes down primarily to bandwidth -- leveraging the dark fiber that was stuffed underground in huge quantities five years ago to support communication services that weren't economically feasible at that time but we were all so stoked we didn't care. The companies that built those networks have departed for the most part but the fiber remains. And with the capital cost of that fiber having been absorbed through bankruptcies, the advent of new technologies for pumping even more photons down the line, and the inexorable force of Moore's Law, many of the things we thought we'd be doing in 1999 we'll actually be doing by late 2005.
The New Boom
Today companies are starting small and lean and staying that way.
Be careful what you wish for, all of you with the "Please, God, just one more bubble!" bumper stickers. It's getting wild again in Silicon Valley. In recent months, the breathtaking ascent of Google has lit a fire under its competitors, which include practically everyone in the online world. The result is all too familiar: seven-figure recruiting packages, snarled traffic on Highway 101, and a general sense that the boom is back.
A boom perhaps, but not (phew!) a bubble. There's a difference. Bubbles are inflated with hot air and speculation. They end with a wet pop, leaving behind messy splatters. Booms, on the other hand, tend to have strong foundations and gentle conclusions. Bubbles can be good: They spark a huge amount of investment that can make things easier for the next generation, even as they bankrupt the current one. But booms - with their more rational allocation of capital - are better. The problem is that exuberance can make it hard to tell one from the other.
Six years ago, people were likewise making the case that the dotcom frenzy was more boom than bubble, built as it was on the legitimate ground of the Internet revolution. And until late 1999 or so, maybe that was true. Then the Wall Street speculators gained the upper hand, and growth became malignant.
It's hard to know what "normal" prosperity looks like in Silicon Valley. This is, after all, the land of boom and bust - it's been alternating between greed and grief ever since the gold rush. But if there is such a thing as a healthy boom, we're living it now. Google may be trading above $400, but the Nasdaq as a whole has hardly budged in five years. Companies are once again minting millionaires, but venture capitalists are investing less than a fifth of what they were at the 2000 peak. About 50 technology companies went public last year, but more than 300 went public in 1999.
Of course, abundant venture capital and plentiful IPOs were once seen as evidence of vitality. Now, however, we know their true cost: The promise of heady valuations encourages venture capitalists to shower startups with money. And having placed such large bets, the VCs naturally want to fatten those startups for market. Fast cash and accelerated growth make a company lose touch with reality, the simplest explanation for the bubble's most notorious flameouts.
So why is the froth missing from the wave this time? Because the underlying economics are so much healthier, in three main ways.
First, technology adoption has continued at a torrid pace (and even accelerated at times) despite the bust. The dotcom business models of the 1990s may have been based on wild projections of broadband, advertising, and ecommerce trends. But the funny thing is, even after the bubble burst, those trends continued. These days, it's hard to find a technology-adoption projection from 1999 that hasn't come true. Meanwhile, the digital-media boom sparked by the iPod and iTunes has blown through even the most aggressive forecasts.
Today, broadband is mainstream, online shopping is commonplace, everyone has a wireless device or two, and Apple's latest music player was - for the fifth season in a row - the must-have holiday gift. The Internet and digital media are clearly not fads. Over the past decade, we've started to live a life only imagined in mid-'90s business plans. As a result, some silly bubble-era ideas are starting to actually make sense - perhaps a lot of sense.
Free phone calls over the Internet? That's Skype, which eBay just bought for nearly $4 billion. Online virtual communities? Now a global phenomenon in the form of massively multiplayer online games. Free music sites? MySpace, which rivals Google in traffic. (The boom's ultimate echo: The owner of Dog.com just paid $1 million for Fish.com, in hopes of starting what amounts to a new Pets.com. Just so long as it doesn't ship 50-pound bags of chow.)
The second reason that this boom is so different from the last is that the sunk costs of the dotcom era make the economics of entrepreneurship more favorable. In the bad old days, companies bankrupted themselves building out their fiber-optic networks. Bad for investors, good for everyone else: We're now enjoying supercheap bandwidth. So, too, for storage, screens, and a host of other technologies that are benefiting from profligate '90s-era investment and research.
Meanwhile, open source software has come of age, and computer hardware will soon cost less than the electricity it takes to run it. The result: industrial-strength servers that are cheaper than desktop PCs (sorry, Sun). Or, if you prefer, you can buy hardware and software even more cheaply as a hosted service (there's that inexpensive bandwidth again).
The result is that you can start a company today for a tiny fraction of what people spent five years ago. Joe Kraus, cofounder of the bubble-era search engine Excite, estimates that his new company, JotSpot, will make it to first revenues with a total investment of about $100,000 - less than 5?percent of what Excite burned through a decade earlier. Today companies are starting small and lean and staying that way - no more blowing all the first-round funding on PR stunts and rooftop parties. As a result, they're hitting break-even sooner.
In this new environment, startups can grow organically. That means less venture capital is needed - and that's the third reason this boom is different. Less venture capital leads to fewer venture capitalists hustling for early exits at high valuations. That, in turn, reduces the pressure to go public and translates to fewer undercooked companies launching IPOs on hype alone.
So there you have the recipe for a healthy boom, not a fragile bubble: a more receptive marketplace, lower costs, and lighter pressure from investors. Today, the typical exit strategy is to sell your startup to Yahoo! for a few million, not to maneuver for a rowdy IPO and an appearance on CNBC. Highway 101 is jammed with Prius-driving engineers, not biz-dev guys in Beemers. And most New York cab drivers are happily ignorant of what's hot in the Valley, just as they should be.
Six years ago, people were likewise making the case that the dotcom frenzy was more boom than bubble, built as it was on the legitimate ground of the Internet revolution. And until late 1999 or so, maybe that was true. Then the Wall Street speculators gained the upper hand, and growth became malignant.
It's hard to know what "normal" prosperity looks like in Silicon Valley. This is, after all, the land of boom and bust - it's been alternating between greed and grief ever since the gold rush. But if there is such a thing as a healthy boom, we're living it now. Google may be trading above $400, but the Nasdaq as a whole has hardly budged in five years. Companies are once again minting millionaires, but venture capitalists are investing less than a fifth of what they were at the 2000 peak. About 50 technology companies went public last year, but more than 300 went public in 1999.
Of course, abundant venture capital and plentiful IPOs were once seen as evidence of vitality. Now, however, we know their true cost: The promise of heady valuations encourages venture capitalists to shower startups with money. And having placed such large bets, the VCs naturally want to fatten those startups for market. Fast cash and accelerated growth make a company lose touch with reality, the simplest explanation for the bubble's most notorious flameouts.
So why is the froth missing from the wave this time? Because the underlying economics are so much healthier, in three main ways.
First, technology adoption has continued at a torrid pace (and even accelerated at times) despite the bust. The dotcom business models of the 1990s may have been based on wild projections of broadband, advertising, and ecommerce trends. But the funny thing is, even after the bubble burst, those trends continued. These days, it's hard to find a technology-adoption projection from 1999 that hasn't come true. Meanwhile, the digital-media boom sparked by the iPod and iTunes has blown through even the most aggressive forecasts.
Today, broadband is mainstream, online shopping is commonplace, everyone has a wireless device or two, and Apple's latest music player was - for the fifth season in a row - the must-have holiday gift. The Internet and digital media are clearly not fads. Over the past decade, we've started to live a life only imagined in mid-'90s business plans. As a result, some silly bubble-era ideas are starting to actually make sense - perhaps a lot of sense.
Free phone calls over the Internet? That's Skype, which eBay just bought for nearly $4 billion. Online virtual communities? Now a global phenomenon in the form of massively multiplayer online games. Free music sites? MySpace, which rivals Google in traffic. (The boom's ultimate echo: The owner of Dog.com just paid $1 million for Fish.com, in hopes of starting what amounts to a new Pets.com. Just so long as it doesn't ship 50-pound bags of chow.)
The second reason that this boom is so different from the last is that the sunk costs of the dotcom era make the economics of entrepreneurship more favorable. In the bad old days, companies bankrupted themselves building out their fiber-optic networks. Bad for investors, good for everyone else: We're now enjoying supercheap bandwidth. So, too, for storage, screens, and a host of other technologies that are benefiting from profligate '90s-era investment and research.
Meanwhile, open source software has come of age, and computer hardware will soon cost less than the electricity it takes to run it. The result: industrial-strength servers that are cheaper than desktop PCs (sorry, Sun). Or, if you prefer, you can buy hardware and software even more cheaply as a hosted service (there's that inexpensive bandwidth again).
The result is that you can start a company today for a tiny fraction of what people spent five years ago. Joe Kraus, cofounder of the bubble-era search engine Excite, estimates that his new company, JotSpot, will make it to first revenues with a total investment of about $100,000 - less than 5?percent of what Excite burned through a decade earlier. Today companies are starting small and lean and staying that way - no more blowing all the first-round funding on PR stunts and rooftop parties. As a result, they're hitting break-even sooner.
In this new environment, startups can grow organically. That means less venture capital is needed - and that's the third reason this boom is different. Less venture capital leads to fewer venture capitalists hustling for early exits at high valuations. That, in turn, reduces the pressure to go public and translates to fewer undercooked companies launching IPOs on hype alone.
So there you have the recipe for a healthy boom, not a fragile bubble: a more receptive marketplace, lower costs, and lighter pressure from investors. Today, the typical exit strategy is to sell your startup to Yahoo! for a few million, not to maneuver for a rowdy IPO and an appearance on CNBC. Highway 101 is jammed with Prius-driving engineers, not biz-dev guys in Beemers. And most New York cab drivers are happily ignorant of what's hot in the Valley, just as they should be.
For Start-Ups, Web Success on the Cheap
SAN FRANCISCO, Nov. 8 — When Seth J. Sternberg and two colleagues started Meebo, a Web-based instant-messaging service, they didn’t go looking for venture capitalists. Using their credit cards, they financed the company themselves to the tune of $2,000 apiece. It was enough to cover their biggest expense — leasing a few computer servers at $120 a month each.
Within a month of its introduction in September 2005, Meebo was getting as many as 50,000 log-ins a day, and it needed more servers. It decided to take a modest $100,000 from three angel investors, wealthy individuals who typically contribute small amounts but do not get involved in management decisions.
“We had a bunch of V.C.’s talking to us about potentially putting more money in,” Mr. Sternberg said. “We said no. A lot of things happen when you raise a V.C. round, and they really slow you down.”
Eventually, Meebo did raise money from venture investors — about $3.5 million from Sequoia Capital. But that was after the company was well on its way to showing that its service was a hit; Meebo had about 200,000 daily log-ins.
In the last couple of years, hundreds of other Internet start-up companies in Silicon Valley and elsewhere have followed a similar trajectory. Unlike most companies formed during the first Internet boom, which were built on costly technology and marketing budgets, many of the current crop of Internet start-ups have gone from zero to 60 on a shoestring.
Some have gone without venture capital altogether or have raised far smaller sums than venture investors would have liked. Many were sold for millions before venture capitalists could even get in. That has been a challenge for venture capitalists, who have raised record amounts in recent years and need places to put that money to work.
“V.C.’s hate it; they want you to take big money,” said Jay Adelson, who is the chief executive of two start-ups, Digg and Revision3. Digg took some venture money, but far less than backers offered, and Revision3 has been running on about $850,000 raised from a group of angel investors.
Several venture firms are seeking to adapt. Just last week, Charles River Ventures announced it would offer loans of $250,000 to entrepreneurs as a way to gain access to promising start-ups. Other firms are also giving out small loans, albeit not as a part of any formal program.
For its part, Mohr Davidow Ventures has increased the number of “seed” investments — small sums given to embryonic companies — to about 10 a year from 5. And Union Square Ventures, which was formed in 2003, has made nearly half of its investments at $1 million or less, a departure from its initial plan to make first-round bets of $1 million to $3 million, according to its Web site.
“I think there is in the V.C. community a sense that the rules have changed or are changing,” said John Battelle, a journalist and entrepreneur, who is a host of a technology conference in San Francisco this week that will include a panel on the subject. “How does the V.C. who is set up for a model that requires millions, if not tens of millions, revamp for a different scale?”
And as large firms try to go small, they are encountering a new crop of competitors who are happy to bankroll start-ups on the cheap and are fueling the current Internet boom. They include a large pool of angel investors and a number of small venture funds whose specialty is to invest tens of thousands of dollars, or hundreds of thousands at most.
There is even a group called Y Combinator, whose rule of thumb for investing in start-ups is $6,000 per employee. One of its investments, Reddit, was acquired last week by Wired Digital, which is owned by Condé Nast Publications, for an undisclosed sum.
“I came to the conclusion that $500,000 was the new $5 million,” said Michael Maples Jr., an entrepreneur who created a $15 million venture fund aimed at investing in companies that required little capital. Mr. Maples sees himself not so much as a competitor to venture capitalists, but as someone who is filling the gap between angels, who may invest $250,000 or so in a start-up, and venture investors, whose typical early-stage bet is closer to $5 million.
Several forces are allowing companies to operate cheaply compared with the first Internet boom. They include the declining costs of hardware and bandwidth, the wide availability of open-source software, and the ability to generate revenue through online ads.
“It’s a great time to be an entrepreneur,” Joe Kraus, a veteran of the dot-com boom, wrote in a widely noted blog posting last year. Mr. Kraus said it took $3 million to get his first start-up, Excite.com, from idea to product, much of it spent on servers and software, which have since become much cheaper or even free. His new start-up, JotSpot, was started on just $100,000.
With the notable exception of YouTube, many recent acquisitions involved Internet start-ups that simply could not effectively use large amounts from venture capitalists or produce large returns, said Paul Kedrosky, a venture capitalist and blogger.
“The problem is that as a V.C., these companies don’t soak up enough capital,” Mr. Kedrosky said.
To succeed, a firm with a $250 million fund needs a handful of investments from $10 million to $15 million that can return payouts of $150 million or more, Mr. Kedrosky said. But even a twentyfold return on a $1 million investment will not do much for the success of a large fund, Mr. Kedrosky said.
For smaller funds, the economics are far different. For starters, those who manage them do not earn huge management fees. Instead, they are almost always among the largest investors in the fund, so they will earn a return if the investments pay off.
“I think large venture funds in this economic model have a challenge,” said Josh Kopelman, managing director of First Round Capital. Since starting First Round in 2004, Mr. Kopelman has made about 30 investments that range from $250,000 to $500,000. Mr. Kopelman, who made a fortune as a serial entrepreneur, is the largest investor in First Round’s $50 million fund.
Y Combinator is aiming at even smaller firms, and its approach is decidedly unorthodox. It chooses companies for financing in two batches of 8 to 12; one batch is selected in the winter from companies based in Silicon Valley, the other in the summer from those in Cambridge, Mass.
“When you change the amount of money, a lot of things change,” said Paul Graham, one of four partners in Y Combinator, who made millions when his company, Viaweb, was sold to Yahoo in 1998. “We have to mass-produce things. We can be more risky. We are like mice, and V.C.’s are more like elephants. They can only make a few deals, so each one has a whole amount of weight and worry attached to it.”
As for the target investment of $6,000 for each employee, an explanation on Y Combinator’s Web site makes it clear that Mr. Graham and his colleagues are not looking for computer science entrepreneurs who want to be pampered: “C.S. grad students at M.I.T. currently get $2,000/month to live on, so this represents three months’ living expenses. Though in fact most groups make it last longer.”
Established venture capitalists, however, say the new crop of capital-efficient start-ups represents an opportunity, not a problem.
“Companies have bootstrapped themselves in earlier eras,” said Gary Morgenthaler, a general partner at Morgenthaler Ventures. “There is no shortage of companies that need venture capital and company-building skills.”
Jon Feiber, a general partner at Mohr Davidow Ventures, said it was “incredibly good and healthy” that many Internet start-ups were able to do more with less.
“A small percentage of those companies will lend themselves to the model of a larger fund,” Mr. Feiber said. “If your goal is to generate something of huge value and scale, it is going to take more than $300,000 or $400,000.”
JotSpot, the company that Mr. Kraus started on $100,000, may fit that mold. The company eventually took in $4.5 million from a pair of venture capital firms, and last week it was acquired by Google for an undisclosed sum.
“I think it could be a great time to be a venture capitalist,” Mr. Kraus said in an interview. “Like in any competitive market, fear and hope are the two competing forces.” And for venture capitalists, the success of scrappy start-ups may simply be heightening the fear. “I think there is a lot of fear that people won’t get into the best deals,” Mr. Kraus said.
Within a month of its introduction in September 2005, Meebo was getting as many as 50,000 log-ins a day, and it needed more servers. It decided to take a modest $100,000 from three angel investors, wealthy individuals who typically contribute small amounts but do not get involved in management decisions.
“We had a bunch of V.C.’s talking to us about potentially putting more money in,” Mr. Sternberg said. “We said no. A lot of things happen when you raise a V.C. round, and they really slow you down.”
Eventually, Meebo did raise money from venture investors — about $3.5 million from Sequoia Capital. But that was after the company was well on its way to showing that its service was a hit; Meebo had about 200,000 daily log-ins.
In the last couple of years, hundreds of other Internet start-up companies in Silicon Valley and elsewhere have followed a similar trajectory. Unlike most companies formed during the first Internet boom, which were built on costly technology and marketing budgets, many of the current crop of Internet start-ups have gone from zero to 60 on a shoestring.
Some have gone without venture capital altogether or have raised far smaller sums than venture investors would have liked. Many were sold for millions before venture capitalists could even get in. That has been a challenge for venture capitalists, who have raised record amounts in recent years and need places to put that money to work.
“V.C.’s hate it; they want you to take big money,” said Jay Adelson, who is the chief executive of two start-ups, Digg and Revision3. Digg took some venture money, but far less than backers offered, and Revision3 has been running on about $850,000 raised from a group of angel investors.
Several venture firms are seeking to adapt. Just last week, Charles River Ventures announced it would offer loans of $250,000 to entrepreneurs as a way to gain access to promising start-ups. Other firms are also giving out small loans, albeit not as a part of any formal program.
For its part, Mohr Davidow Ventures has increased the number of “seed” investments — small sums given to embryonic companies — to about 10 a year from 5. And Union Square Ventures, which was formed in 2003, has made nearly half of its investments at $1 million or less, a departure from its initial plan to make first-round bets of $1 million to $3 million, according to its Web site.
“I think there is in the V.C. community a sense that the rules have changed or are changing,” said John Battelle, a journalist and entrepreneur, who is a host of a technology conference in San Francisco this week that will include a panel on the subject. “How does the V.C. who is set up for a model that requires millions, if not tens of millions, revamp for a different scale?”
And as large firms try to go small, they are encountering a new crop of competitors who are happy to bankroll start-ups on the cheap and are fueling the current Internet boom. They include a large pool of angel investors and a number of small venture funds whose specialty is to invest tens of thousands of dollars, or hundreds of thousands at most.
There is even a group called Y Combinator, whose rule of thumb for investing in start-ups is $6,000 per employee. One of its investments, Reddit, was acquired last week by Wired Digital, which is owned by Condé Nast Publications, for an undisclosed sum.
“I came to the conclusion that $500,000 was the new $5 million,” said Michael Maples Jr., an entrepreneur who created a $15 million venture fund aimed at investing in companies that required little capital. Mr. Maples sees himself not so much as a competitor to venture capitalists, but as someone who is filling the gap between angels, who may invest $250,000 or so in a start-up, and venture investors, whose typical early-stage bet is closer to $5 million.
Several forces are allowing companies to operate cheaply compared with the first Internet boom. They include the declining costs of hardware and bandwidth, the wide availability of open-source software, and the ability to generate revenue through online ads.
“It’s a great time to be an entrepreneur,” Joe Kraus, a veteran of the dot-com boom, wrote in a widely noted blog posting last year. Mr. Kraus said it took $3 million to get his first start-up, Excite.com, from idea to product, much of it spent on servers and software, which have since become much cheaper or even free. His new start-up, JotSpot, was started on just $100,000.
With the notable exception of YouTube, many recent acquisitions involved Internet start-ups that simply could not effectively use large amounts from venture capitalists or produce large returns, said Paul Kedrosky, a venture capitalist and blogger.
“The problem is that as a V.C., these companies don’t soak up enough capital,” Mr. Kedrosky said.
To succeed, a firm with a $250 million fund needs a handful of investments from $10 million to $15 million that can return payouts of $150 million or more, Mr. Kedrosky said. But even a twentyfold return on a $1 million investment will not do much for the success of a large fund, Mr. Kedrosky said.
For smaller funds, the economics are far different. For starters, those who manage them do not earn huge management fees. Instead, they are almost always among the largest investors in the fund, so they will earn a return if the investments pay off.
“I think large venture funds in this economic model have a challenge,” said Josh Kopelman, managing director of First Round Capital. Since starting First Round in 2004, Mr. Kopelman has made about 30 investments that range from $250,000 to $500,000. Mr. Kopelman, who made a fortune as a serial entrepreneur, is the largest investor in First Round’s $50 million fund.
Y Combinator is aiming at even smaller firms, and its approach is decidedly unorthodox. It chooses companies for financing in two batches of 8 to 12; one batch is selected in the winter from companies based in Silicon Valley, the other in the summer from those in Cambridge, Mass.
“When you change the amount of money, a lot of things change,” said Paul Graham, one of four partners in Y Combinator, who made millions when his company, Viaweb, was sold to Yahoo in 1998. “We have to mass-produce things. We can be more risky. We are like mice, and V.C.’s are more like elephants. They can only make a few deals, so each one has a whole amount of weight and worry attached to it.”
As for the target investment of $6,000 for each employee, an explanation on Y Combinator’s Web site makes it clear that Mr. Graham and his colleagues are not looking for computer science entrepreneurs who want to be pampered: “C.S. grad students at M.I.T. currently get $2,000/month to live on, so this represents three months’ living expenses. Though in fact most groups make it last longer.”
Established venture capitalists, however, say the new crop of capital-efficient start-ups represents an opportunity, not a problem.
“Companies have bootstrapped themselves in earlier eras,” said Gary Morgenthaler, a general partner at Morgenthaler Ventures. “There is no shortage of companies that need venture capital and company-building skills.”
Jon Feiber, a general partner at Mohr Davidow Ventures, said it was “incredibly good and healthy” that many Internet start-ups were able to do more with less.
“A small percentage of those companies will lend themselves to the model of a larger fund,” Mr. Feiber said. “If your goal is to generate something of huge value and scale, it is going to take more than $300,000 or $400,000.”
JotSpot, the company that Mr. Kraus started on $100,000, may fit that mold. The company eventually took in $4.5 million from a pair of venture capital firms, and last week it was acquired by Google for an undisclosed sum.
“I think it could be a great time to be a venture capitalist,” Mr. Kraus said in an interview. “Like in any competitive market, fear and hope are the two competing forces.” And for venture capitalists, the success of scrappy start-ups may simply be heightening the fear. “I think there is a lot of fear that people won’t get into the best deals,” Mr. Kraus said.
ArsDigita: From Start-Up to Bust-Up.
Within a few weeks of Allen's arrival, I found people telling me that I had no power at all.
If you've been hanging out around courthouses in Delaware lately, you may have heard about some legal acrimony involving ArsDigita's venture capitalists versus the ArsDigita co-founders. This letter explains how it came about (from the perspective of one of the defendants).
Note that 99 percent of the information in this document is irrelevant to the lawsuit. The lawsuit has to do with the rights of the shareholders to control management based on some technical points of law and contract. In other words, the questions of who is best qualified to run the company and whether business decisions have been correct are largely irrelevant.
Note that 99 percent of the information in this document is irrelevant to the lawsuit. The lawsuit has to do with the rights of the shareholders to control management based on some technical points of law and contract. In other words, the questions of who is best qualified to run the company and whether business decisions have been correct are largely irrelevant.
Let's go back to 1993. That's when we started developing the domain knowledge that led to the ArsDigita Community System product. Most people who've made money in the software business are those who wrapped their minds around a problem earlier than others. You can't base a business on "we'll be better programmers than the folks at Microsoft and Oracle"; each company has enough computer science PhDs and expert software engineers to bury 100 competitors. You can, however, base a business on "we'll attack this problem a few years before Microsoft and Oracle notice it and recognize it as a problem."
Adobe is a good example of a small software company that has thrived despite possible competition from much larger companies. Check out http://www.adobe.com/aboutadobe/pressroom/executivebios/johnwarnock.html and http://www.adobe.com/aboutadobe/pressroom/executivebios/charlesgeschke.html You can see that these two guys, who have managed Adobe since its inception, spent a lot of time at Xerox PARC and Evans and Sutherland grappling with substantially the same kinds of problems for which Adobe provides solutions.
Adobe's engineers and founders aren't smarter than Microsoft's; they merely started thinking about graphics and publishing before the Microsoft folks did.
Fast forward to 1998. We have contracts with a few big companies: AOL, HP, Levi Strauss, Oracle. We are recognized as thought leaders (publication by Macmillan of Database Backed Web Sites) and market leaders (our open source software for online learning communities). As GE's Jack Welch will tell you, it is a lot easier and more fun working for a company that is #1 or #2 in its market. For one thing, customers will knock on your door.
By 1999, customers were knocking like crazy. A good example was Siemens. They had a critical business problem that could be solved by the ArsDigita Community System. Recognizing the goodness of fit between our product and Siemens's problem, Boston Consulting Group brought them to our old HQ (603 Franklin) and within two weeks we had a contract.
We expanded. We were still small, though, and we avoided direct confrontations with heavily financed competitors. They were closed-source; we were open source. We'd undermine them by creating a world-wide open-source standard rather than try to outshout them with full-page ads in Business 2.0. We laughed at most of the small closed-source companies, asking "What's their marketing slogan? We're just like Microsoft and Oracle but without the market leadership and profits? And how does that slogan work for recruiting?"
By March 2000 we had grown to 80 people. I was still CEO and beginning to feel nervous that, for every task in the company, I could not say exactly who was supposed to do what and by when. But we were profitable, with monthly service contract revenue coming in at a $20 million/year rate. We'd paid nearly $1 million in income tax on our profits for calendar year 1999. Not so bad considering that we built everything from a $10,000 investment.
We'd never sought venture capital but our revenue and profits were bringing some of the top East Coast firms to our door. Most of the time these guys were being forced by the frenzied times into investment in a company and figuring out how to get revenues later (and profits much much later). ArsDigita looked a lot better than than the typical "wing and a prayer" bunch of guys with a fancy spreadsheet. Despite 1000 percent annual growth, we had cash. Most of our revenue was recurring. Most of our customers were happy and loyal.
Companies don't like to rely on enterprise software from small companies. There is too much risk that the vendor will go bankrupt. Open source ameliorates this risk to some extent but the tendency to stick to IBM, Microsoft, and Oracle is strong. We tried to present a face of financial invincibility to the world. We bought a Ferrari to give away to any employee who recruited 10 friends. In reality the car only cost $2,000 per month, the person who won it only got to drive it for as long as he or she was employed, and the cost of a Ferrari is much lower than 10 headhunter commissions. But sitting in the parking lot it gave us the appearance of extravagance while inside the building we were living the frugal life--in a world starved for software development talent, it would have been hard to lose money paying MIT-educated programmers $50-85,000 base salaries plus an end-of-year bonus based on accomplishment and the firm's performance. We had a couple of other Ferrari-like schemes up our sleeves. One was a beach house on Cape Cod where teams of programmers would go to work and write. Another was ArsDigita University, a tuition-free post-baccalaureate one-year computer science program. These things sounded outrageous, gave people a way to remember who we were, gave journalists a reason to write about us (and they did), all while costing no more in total than our 1999 profit (i.e., practically nothing if our revenue had continued to grow).
At the end of March 2000 we closed a venture capital financing with Greylock and General Atlantic. By the time a couple of small checks arrived we had an extra $38 million to put in the bank. We figured that we could use the extra money to place some bets on product development and marketing. Under the product development rubric we thought we'd not make the client teams carry the full weight of ACS development on their shoulders. If they found a client whose needs were similar to what we wanted in the product, we'd do the job for a low-ish price to get experience with that problem (see the "domain knowledge" sentence above) and develop reusable code to enhance ACS. Under the marketing rubric we'd expand our "education marketing" program. Finally, we wanted working capital. A company with $20 million in revenue really needs to have about $10 million in the bank in case a customer doesn't pay, the economy turns soft, an important project is late, etc. Because we'd been growing 1000 percent per year we never had more than a couple of million dollars in the bank.
The terms of the venture capital investment were that the VCs purchased stock that gave them about 30% of the issued shares. Under standard corporate governance, a minority ownership interest such as this would give the VCs little or no control over the direction of the company. So we also had a stockholder's agreement that required the existing shareholders (myself and Jin Choi) to vote for a board of directors that consisted of
1 Greylock person1 General Atlantic person3 senior officers from ArsDigita, including the CEO2 outsidersSo the VCs would have 2 out of 7 board seats. The shareholders would elect the rest. Plus the VCs got veto power over certain kinds of big transactions, such as the buying of expensive capital equipment, the selling of the company, the acquiring of another company. Finally in the event that the company was sold, they were entitled to the first $38 million off the top of the deal (note that this makes all of the common shares theoretically worthless in the event of a sale for less than $38 million). The terms we'd been offered from the three other serious venture capitalist bidders were similar. They wanted "a seat at the table" but nobody was asking for absolute power over the company going forward; the firms proposed to help ArsDigita's founders do what we'd been doing successful already.
In parallel to all of this VC stuff we'd been trying to recruit an "outside CEO". Based on my conversations with successful business people around the world, I now believe this is a fundamentally bad idea. Even the most able person will need a few years to learn about a company's market, challenge, mission, culture, and people. A fresh-from-the-outside CEO might be successful at a 50-year-old company with a huge bureaucracy that manages itself (cf. George W. Bush taking over the Federal Government). But young enterprises don't have that kind of inherent stability.
Anyway, as it happens we recruited Allen Shaheen on the recommendation of Chip Hazard, a Greylock employee who would ultimately represent the firm on our Board. Allen came from Cambridge Technology Partners (CTP) where he managed a large group of consultants in the overseas division of this IT services firm. I knew that Allen had no background in the software products business and that he had not been responsible for establishing overall strategy and thought leadership at CTP. In short, he had always worked for someone else and in a less competitive business than software products. Still, the other candidates we'd interviewed had been either very poorly prepared (one from Lotus) or were very aggressive and in-your-face and my top managers at the time didn't think that they could work with them. Allen seemed like the kind of guy who would work well with the difficult personalities populating the companies' far-flung offices. He had experience managing a multi-national services business. So the plan was that I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business.
Within a few weeks of Allen's arrival, I found people telling me that I had no power at all, pointing out that Allen and the two VCs could vote as a bloc on the Board. We had not yet filled the two outsider positions so this point was tough to argue. 3 out of 5 = absolute power. Period.
April 2000 through March 2001For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they
spent $20 million to get back to the same revenue that I had when I was CEO
declined Microsoft's offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said "He reminds me of a lot of CEOs of companies that we've worked with... that have gone bankrupt.")
deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn't figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn't be in the building on weekends and neither would the employees bother to come in.
surrendered market leadership and thought leadership How could these three guys have achieved such dreadful results? For that it is worth looking at what kind of leadership is required for a software products company. First, you probably want someone who has previously founded and run a company or been CEO at a company founded by others (i.e., not someone who has been an employee his or her whole life). Second, you probably want someone who has previous experience as an executive in the software products business. Third, you probably want someone with domain knowledge. Fourth, you probably want someone with technical knowledge.
Whatever strengths Peter, Chip, and Allen may have, all three were 0 for 4 on the qualifications listed above.
Software products is a rough business because it moves fast and attracts smart people. Furthermore you have companies like Microsoft where people work nights and weekends backed up by a cash hoard of $20 billion and a global brand. As an investor, you never want to send your company up against the Microsofts of the world unless your managers are smart, hard-working, and have the right experience. If they don't, you need to look for a less competitive business. Maybe you can offer training or admin services for a Microsoft or Oracle product. Or maybe you should get out of the IT business altogether and apply your capital and employees to something like party equipment rental (you don't see too many table and chair rental companies with $20 billion in the bank and MIT PhDs working nights and weekends trying to put their competitors out of business).
At this point you might ask "Hey, weren't you still on the Board?" Sure. But for most of this year Chip, Peter, and Allen didn't want to listen to me. They even developed a theory for why they didn't have to listen to me: I'd hurt their feelings by criticizing their performance and capabilities; self-esteem was the most important thing in running a business; ergo, because I was injuring their self-esteem it was better if they just turned a deaf ear. I'm not sure how much time these three guys had ever spent with engineers. Chuck Vest, the president of MIT, in a private communication to some faculty, once described MIT as "a no-praise zone". My first week as an electrical engineering and computer science graduate student I asked a professor for help with a problem. He talked to me for a bit and then said "You're having trouble with this problem because you don't know anything and you're not working very hard."
Adobe is a good example of a small software company that has thrived despite possible competition from much larger companies. Check out http://www.adobe.com/aboutadobe/pressroom/executivebios/johnwarnock.html and http://www.adobe.com/aboutadobe/pressroom/executivebios/charlesgeschke.html You can see that these two guys, who have managed Adobe since its inception, spent a lot of time at Xerox PARC and Evans and Sutherland grappling with substantially the same kinds of problems for which Adobe provides solutions.
Adobe's engineers and founders aren't smarter than Microsoft's; they merely started thinking about graphics and publishing before the Microsoft folks did.
Fast forward to 1998. We have contracts with a few big companies: AOL, HP, Levi Strauss, Oracle. We are recognized as thought leaders (publication by Macmillan of Database Backed Web Sites) and market leaders (our open source software for online learning communities). As GE's Jack Welch will tell you, it is a lot easier and more fun working for a company that is #1 or #2 in its market. For one thing, customers will knock on your door.
By 1999, customers were knocking like crazy. A good example was Siemens. They had a critical business problem that could be solved by the ArsDigita Community System. Recognizing the goodness of fit between our product and Siemens's problem, Boston Consulting Group brought them to our old HQ (603 Franklin) and within two weeks we had a contract.
We expanded. We were still small, though, and we avoided direct confrontations with heavily financed competitors. They were closed-source; we were open source. We'd undermine them by creating a world-wide open-source standard rather than try to outshout them with full-page ads in Business 2.0. We laughed at most of the small closed-source companies, asking "What's their marketing slogan? We're just like Microsoft and Oracle but without the market leadership and profits? And how does that slogan work for recruiting?"
By March 2000 we had grown to 80 people. I was still CEO and beginning to feel nervous that, for every task in the company, I could not say exactly who was supposed to do what and by when. But we were profitable, with monthly service contract revenue coming in at a $20 million/year rate. We'd paid nearly $1 million in income tax on our profits for calendar year 1999. Not so bad considering that we built everything from a $10,000 investment.
We'd never sought venture capital but our revenue and profits were bringing some of the top East Coast firms to our door. Most of the time these guys were being forced by the frenzied times into investment in a company and figuring out how to get revenues later (and profits much much later). ArsDigita looked a lot better than than the typical "wing and a prayer" bunch of guys with a fancy spreadsheet. Despite 1000 percent annual growth, we had cash. Most of our revenue was recurring. Most of our customers were happy and loyal.
Companies don't like to rely on enterprise software from small companies. There is too much risk that the vendor will go bankrupt. Open source ameliorates this risk to some extent but the tendency to stick to IBM, Microsoft, and Oracle is strong. We tried to present a face of financial invincibility to the world. We bought a Ferrari to give away to any employee who recruited 10 friends. In reality the car only cost $2,000 per month, the person who won it only got to drive it for as long as he or she was employed, and the cost of a Ferrari is much lower than 10 headhunter commissions. But sitting in the parking lot it gave us the appearance of extravagance while inside the building we were living the frugal life--in a world starved for software development talent, it would have been hard to lose money paying MIT-educated programmers $50-85,000 base salaries plus an end-of-year bonus based on accomplishment and the firm's performance. We had a couple of other Ferrari-like schemes up our sleeves. One was a beach house on Cape Cod where teams of programmers would go to work and write. Another was ArsDigita University, a tuition-free post-baccalaureate one-year computer science program. These things sounded outrageous, gave people a way to remember who we were, gave journalists a reason to write about us (and they did), all while costing no more in total than our 1999 profit (i.e., practically nothing if our revenue had continued to grow).
At the end of March 2000 we closed a venture capital financing with Greylock and General Atlantic. By the time a couple of small checks arrived we had an extra $38 million to put in the bank. We figured that we could use the extra money to place some bets on product development and marketing. Under the product development rubric we thought we'd not make the client teams carry the full weight of ACS development on their shoulders. If they found a client whose needs were similar to what we wanted in the product, we'd do the job for a low-ish price to get experience with that problem (see the "domain knowledge" sentence above) and develop reusable code to enhance ACS. Under the marketing rubric we'd expand our "education marketing" program. Finally, we wanted working capital. A company with $20 million in revenue really needs to have about $10 million in the bank in case a customer doesn't pay, the economy turns soft, an important project is late, etc. Because we'd been growing 1000 percent per year we never had more than a couple of million dollars in the bank.
The terms of the venture capital investment were that the VCs purchased stock that gave them about 30% of the issued shares. Under standard corporate governance, a minority ownership interest such as this would give the VCs little or no control over the direction of the company. So we also had a stockholder's agreement that required the existing shareholders (myself and Jin Choi) to vote for a board of directors that consisted of
1 Greylock person1 General Atlantic person3 senior officers from ArsDigita, including the CEO2 outsidersSo the VCs would have 2 out of 7 board seats. The shareholders would elect the rest. Plus the VCs got veto power over certain kinds of big transactions, such as the buying of expensive capital equipment, the selling of the company, the acquiring of another company. Finally in the event that the company was sold, they were entitled to the first $38 million off the top of the deal (note that this makes all of the common shares theoretically worthless in the event of a sale for less than $38 million). The terms we'd been offered from the three other serious venture capitalist bidders were similar. They wanted "a seat at the table" but nobody was asking for absolute power over the company going forward; the firms proposed to help ArsDigita's founders do what we'd been doing successful already.
In parallel to all of this VC stuff we'd been trying to recruit an "outside CEO". Based on my conversations with successful business people around the world, I now believe this is a fundamentally bad idea. Even the most able person will need a few years to learn about a company's market, challenge, mission, culture, and people. A fresh-from-the-outside CEO might be successful at a 50-year-old company with a huge bureaucracy that manages itself (cf. George W. Bush taking over the Federal Government). But young enterprises don't have that kind of inherent stability.
Anyway, as it happens we recruited Allen Shaheen on the recommendation of Chip Hazard, a Greylock employee who would ultimately represent the firm on our Board. Allen came from Cambridge Technology Partners (CTP) where he managed a large group of consultants in the overseas division of this IT services firm. I knew that Allen had no background in the software products business and that he had not been responsible for establishing overall strategy and thought leadership at CTP. In short, he had always worked for someone else and in a less competitive business than software products. Still, the other candidates we'd interviewed had been either very poorly prepared (one from Lotus) or were very aggressive and in-your-face and my top managers at the time didn't think that they could work with them. Allen seemed like the kind of guy who would work well with the difficult personalities populating the companies' far-flung offices. He had experience managing a multi-national services business. So the plan was that I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business.
Within a few weeks of Allen's arrival, I found people telling me that I had no power at all, pointing out that Allen and the two VCs could vote as a bloc on the Board. We had not yet filled the two outsider positions so this point was tough to argue. 3 out of 5 = absolute power. Period.
April 2000 through March 2001For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they
spent $20 million to get back to the same revenue that I had when I was CEO
declined Microsoft's offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said "He reminds me of a lot of CEOs of companies that we've worked with... that have gone bankrupt.")
deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn't figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn't be in the building on weekends and neither would the employees bother to come in.
surrendered market leadership and thought leadership How could these three guys have achieved such dreadful results? For that it is worth looking at what kind of leadership is required for a software products company. First, you probably want someone who has previously founded and run a company or been CEO at a company founded by others (i.e., not someone who has been an employee his or her whole life). Second, you probably want someone who has previous experience as an executive in the software products business. Third, you probably want someone with domain knowledge. Fourth, you probably want someone with technical knowledge.
Whatever strengths Peter, Chip, and Allen may have, all three were 0 for 4 on the qualifications listed above.
Software products is a rough business because it moves fast and attracts smart people. Furthermore you have companies like Microsoft where people work nights and weekends backed up by a cash hoard of $20 billion and a global brand. As an investor, you never want to send your company up against the Microsofts of the world unless your managers are smart, hard-working, and have the right experience. If they don't, you need to look for a less competitive business. Maybe you can offer training or admin services for a Microsoft or Oracle product. Or maybe you should get out of the IT business altogether and apply your capital and employees to something like party equipment rental (you don't see too many table and chair rental companies with $20 billion in the bank and MIT PhDs working nights and weekends trying to put their competitors out of business).
At this point you might ask "Hey, weren't you still on the Board?" Sure. But for most of this year Chip, Peter, and Allen didn't want to listen to me. They even developed a theory for why they didn't have to listen to me: I'd hurt their feelings by criticizing their performance and capabilities; self-esteem was the most important thing in running a business; ergo, because I was injuring their self-esteem it was better if they just turned a deaf ear. I'm not sure how much time these three guys had ever spent with engineers. Chuck Vest, the president of MIT, in a private communication to some faculty, once described MIT as "a no-praise zone". My first week as an electrical engineering and computer science graduate student I asked a professor for help with a problem. He talked to me for a bit and then said "You're having trouble with this problem because you don't know anything and you're not working very hard."
After December 2000 they stopped having board meetings altogether. Instead they had "investor meetings" that were attended by Allen, Ern Blackwelder (the COO, who'd already been told that he was going to be replaced), Greylock, and General Atlantic. In other words, all five board members except me would meet.
Board-level decisions were made not only without the chairman having an opportunity to vote but without the chairman (me) even being given notice. For example, after that final December 2000 board meeting, Allen, Ern, and the VCs (a) decided how much bonus to pay the CEO and COO for 2000, (b) named Jim Jordan to be Chief Financial Officer (see http://www.arsdigita.com/news/), (c) decided to eliminate me as Chairman and announced to the press that I was already gone (implying that I'd resigned though it was untrue), (d) hired and appointed Richard Buck as Senior Vice President of Engineering, (e) hired and appointed Dave Menninger as Senior Vice President of Marketing (again, see http://www.arsdigita.com/news/ ), etc.
What about the two outsider seats?At this point you might ask "Hey, what about those two outsider seats?" At various times during the rule of Greylock, General Atlantic, and Allen I would push for the nomination of someone with software products experience. Nobody was ever approved. On November 22, 2000 I emailed Bill Helman and Bill Kaiser, two other Greylock employees who'd pitched ArsDigita, trying to set up a meeting to discuss getting a couple of good outsider board members:
... As an investor in the company, though, I'm concerned that ArsDigita is
left without a single engineering expert on the board or on the
management team. I'm not sure what your experience is but mine is
that it is tough for tech companies to succeed without some
engineering expertise at or near the top. ...
They were reluctant to get involved, saying that normally everything should be piped through the Greylock employee actually sitting on a portfolio company's board, in this case Chip Hazard, the very person whose lack of engineering experience was contributing to ArsDigita's bleed. Kaiser agreed to meet me, however, after a couple of weeks. We walked around the MIT campus for 30 minutes. When I explained the problems with the product and the financials, Kaiser said "Isn't it possible that this is just your opinion, that Allen and Chip would see it differently?"
Relativism. It was impressive in a way to see Protagoras's sophism alive and well after 2500 years. But the "all points of view are equally valid and supported only by someone's opinion" ignores the fact that it is easy to measure the correctness of business beliefs: some people are losing money and some are making money; some companies are gaining market share while others are losing market share.
We gave up on the idea of finding any help from the Greylock corner.
With no voice in company operations and with a board seat in a company that did not have board meetings, it seemed that there was no longer anything that I could do to express the co-founders' wills as shareholders. Keep in mind that ArsDigita had been running in exactly the opposite direction from the way that we wanted it run. We started aD slowly and carefully. We ran it profitably. We placed small bets. We handled money conservatively (though we tried to give the appearance of wildness and fantastic prosperity to the outside world there is actually nothing extravagant about having a fancy beach retreat for a team of programmers that is excited and working 6 days/week, 12 hours/day). We made sure that we were working as hard as teams at Microsoft and startup companies.
By contrast, Allen, Greylock, and General Atlantic presented us (Common shareholders) with a strategy of "here's this spreadsheet that shows us going bankrupt in one year unless a big stream of license revenue starts coming in." And, oh yes, the revenue would be coming from a product that had never been built, purchased by customers to whom we'd never sold anything.
Do these kinds of risks bother venture capitalists? Having a first-time CEO with zero experience in the industry? Staking everything on a to-be-finished software product? Perhaps not. General Atlantic has $10 billion under management, according to their Web site (gapartners.com). If they point ArsDigita in a direction that leads to tankage, they can fall back on their $9.98 billion in other investments. What about the Common shareholders, though? We never signed up for this kind of risk and we don't have substantial other investments. I put 8 years of my life into ArsDigita Community System. Jin put in 4 years. We would be unhappy to see the company spend through its accumulated profits plus $38 million in capital merely so that three guys in suits could learn a little something about what it is like to run a software products company.
March 2001: The Final Shove March 2001 was a dark time from our shareholder perspective. Some of our greatest assets were pushed out the door. David Rodriguez, for example, a man who had worked like a monster and delivered huge projects to happy clients. Did he refuse to implement abstract URL on the World Bank knowledge management system until I nagged him via email from Australia? Yes. Did he say that ACS 4.0 was unusable? Yes. Did he tell Allen "You talk like a press release"? Yes. These things disqualify dvr from diplomatic service. But as shareholders we didn't like to see someone who had personally delivered more than $1 million in revenue while costing us perhaps $200,000 being pushed out the door. To a non-owner manager, it might make sense to get rid of someone who'd offended you with a harsh word. You're still going to get more than a third of a million dollars in base plus bonus, even if the shareholders take a beating. But as an owner-CEO I would let an employee vent his spleen at me, secure in the knowledge that at the end of the day this guy was building the value of my shares.
Our co-founder Aurelius Prochazka was also axed in the March 2001 massacre. Have Jin and I had to clean up some of his code in the past? Yes. Was Aure rather discouraged and unproductive in the past few months as ArsDigita's financial and market position slid and he reflected on the fact that unqualified people were managing the firm? Yes. Was Aure too quick to criticize highly paid executives whose intellectual abilities fell short of the standards he absorbed at Caltech? Yes. But what kind of a company can you have when you fire someone who is (a) a founder, one of the people who built a $20 million profitable enterprise on capital of $10,000, (b) someone who'd previously built a successful business and sold it, and (c) responsible for the innovative ideas and interface behind some of the ACS's most interesting modules (e.g., file storage)? Aure's PhD is in engineering and not in charm. But if shareholder value were related to average employee charm, Microsoft shareholders would be rather poor indeed.
So what were the shareholders doing in March 2001? Planning some research projects at MIT and Orange/France Telecom. Giving some one-day courses in Thailand and India. Revamping our Software Engineering for Internet Applications course at MIT (recently accepted by the faculty into the core curriculum and renumbered 6.171). In short, getting on with our lives and personal technical goals, working full-time for other companies. We cried if we thought about ArsDigita's financial performance but mostly we tried not to think about it.
Sing, O goddess, the anger of Achilles son of Peleus, that brought countless ills upon the Achaeans. Many a brave soul did it send hurrying down to Hades, and many a hero did it yield a prey to dogs and vultures, for so were the counsels of Jove fulfilled from the day on which the son of Atreus, king of men, and great Achilles, first fell out with one another. -- Iliad, Book I
Peter Bloom, the General Atlantic employee representing their interest on our board, was not crying in March 2001. He was angry, as he had been for many months. Though Agamemnon had not taken his prize girl Briseis to replace the daughter of the priest Chryses, Bloom's anger was not less than that of the great son of Peleus. My habit of pointing out that he'd accomplish more if he picked more important opponents (e.g., Microsoft and Oracle rather than a 37-year-old living in a 2-bedroom apartment in Cambridge) did not cool him down. What really sent him over the edge, as far as I can tell, was when I related my response to a member of the Harvard faculty who asked me what it was like to watch venture capitalists and professional managers run ArsDigita (I replied "like watching a group of nursery school children who've stolen a Boeing 747 and are now flipping all the switches trying to get it to take off").
Peter Bloom sent me an email message on March 28, 2001: "Since you are so troubled by the direction that the company has taken, you can choose to resign from the board before our next meeting. This is your decision to make, but it is a course of action open to you to avoid the public humiliation and significant professional impairment of being removed as Chairman from a board of directors. ... The actions you have taken and the written communication you have directed at individuals has now gotten you in very serious trouble and you need to turn to someone you trust for counsel. I sincerely hope that your trusted confidants will tell you the truth about the impending consequences of your recent communications and accusations before you irreparably impair your reputation and financial future."
Shortly after I received the email message, I stopped by ArsDigita HQ to pick up Alex from Eve. My card key no longer opened the door.
When a company with $10 billion in assets threatens "irreparable impairment of one's financial future" it is time to see a lawyer. So, thanks to Peter's initiative, I trundled down to see Sam Mawn-Mahlau and Paul Mahoney at Edwards and Angell. They prepared a "shareholder's consent" that would change the company by-laws so that, until ArsDigita went public, the CEO and president would be directly elected by the shareholders. The next item on the list was the election of Philip Greenspun as CEO. Another item in this shareholder's consent was to elect two existing vice-presidents of the firm, Tracy Adams and Eve Andersson, to the board. The stockholder's agreement said that the three insiders on the Board had to be "senior executives" so we promoted them to "Executive Vice President" just to be safe.
The effect of this shareholder consent was to trim the venture capitalists back to what they'd bargained for, i.e., two board seats plus veto power over major transactions.
Our shareholder vote happened to occur on the same day that CNET carried a story about how ArsDigita would henceforth abandon its open-source strategy in favor of traditional licensed software and how Philip Greenspun, the "former chairman", had left the company. The next morning, April 6, a courier arrived at 80 Prospect Street (ArsDigita HQ) with a letter for Allen notifying him that he'd been demoted from "President and CEO" to "President". I telephoned Allen to assure him that I didn't want to make any major personnel changes immediately, that I'd be happy to consider the entire last year as water under the bridge and work with him under our original agreement (I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business). I said that I wanted to spend the next few weeks just coming up to speed on the status of the product, the customers, and the company. Allen told me just what I wanted to hear and I was encouraged by the idea of working through him.
April 2001: Allen and the Venture Capitalists File SuitOn April 11, 2001, the following lawsuit was filed in Delaware chancery court: ALLEN SHAHEEN, ERNEST )
BLACKWELDER, GENERAL ATLANTIC )
PARTNERS 64, L.P., a Delaware )
limited partnership, GREYLOCK )
X LIMITED PARTNERSHIP, a )
Delaware limited partnership )
and ARSDIGITA CORPORATION, )
a Delaware corporation, )
)
Plaintiffs, )
)
v. ) Civil Action No. 18821
)
PHILIP GREENSPUN, EVE A. )
ANDERSSON and TRACY E. ADAMS )
)
Defendants. )
As you see from the caption of the case, the lawsuit was filed by Allen, Ern, the VCs, and the corporation itself. We were quite confused by the form of the case, given that this is fundamentally a dispute between two groups of shareholders (the VCs versus the founders). So we'd not expected the corporation itself to have any interest in the case one way or the other.
A conversation with ArsDigita Corporation's corporate counsel, Jay Hachigian from Gunderson, shed some light on the matter. It seems that Allen dipped his hands into the company checking account and scooped out a quarter million dollars to pay the venture capitalists' attorneys in this matter. Jay cautioned the group that this was perhaps not the best idea but they apparently went ahead anyway. Thus we now have the spectacle of a group of shareholders trying to increase the level of accountability of a management team who has, in their view, been doing a bad job. That group of shareholders is being sued by the managers who want to avoid accountability. The lawsuit is being funded with the defendants' own money!
The crux of the plaintiffs' case is that Jin and I signed various agreements promising to do various things, e.g., always vote for a Greylock and General Atlantic representative on the board. The closing documents for our financing formed a stack about the size of a Manhattan Yellow Pages. Supposedly somewhere within this stack it is said that the Board of Directors of ArsDigita won't amend the corporate by-laws without the consent of the venture capitalist members. Nowhere does it prohibit the shareholders from doing this, however. Greylock and General Atlantic would like to read this interpretation into the documents. If memory serves, those documents were drafted by Paul, Weiss (paulweiss.com), General Atlantic's lawyers. So under standard legal doctrines, ambiguity ought to be construed against them. Of course, I'm not a lawyer and nobody can say what another human being, in this case a Delaware judge, is going to do. I personally think it would be a bit shocking for the judge to rule in favor of Greylock and General Atlantic. The effect of such a ruling would be to make the shareholders' voting rights worthless, i.e., the judge would be saying that the VC firms could exercise absolute power forever as if they'd bought the voting rights on our Common shares at the time of the investment.
So, that's the story. Keep in mind that most of what is in this document may well be irrelevant to the outcome of the lawsuit. A court generally does not want to decide which group of people is likely to make better business decisions. A court looks at issues such as "What rights do the owners of a majority of the shares of a company have to control its direction?" or "Can the venture capitalists add extra restrictions, a year later, to an agreement that they made and that is reflected in documents drafted by their own lawyers?"
It will take a couple of months to take everyone's deposition and get through discovery. Then we'll have a trial, maybe in June 2001, in front of a judge in Delaware. The judge might decide the case based on just a few documents, in which case all of the discovery will have been a waste of time.
Why I wrote this Generally people try to say as little as possible during litigation. However, I've been getting progressively more and more annoyed listening to other folks' characterizations of the lawsuit. ArsDigita management was running around the building telling folks that "Philip sued the company", something that was plainly false. Allen was telling people "the venture capitalists have a very strong case" (how come he needed to pay a retainer of $250,000 of the shareholders' money to defeat a couple of individuals if the venture capitalists have such a strong case?). Reporters were making it sound like this was a dispute about ego and control. In a way that was true; Allen, Chip, and Peter did not like being characterized as fools whose ignorance was costing the company $millions. But as far as Jin and I were concerned, the reporters' spin was not true. We'd have been delighted to be passive shareholders in a successful profitable company. What we didn't like was being passive shareholders in a company bleeding cash.
There were some simple practical motivations for writing this article. One of the beauties of the Web is that it can save one from having to repeat oneself. On any normal day, I get 50 email messages from readers of photo.net and philip.greenspun.com asking various questions. A few times every week, a reporter will email or telephone to ask a question. After Greylock and General Atlantic filed suit, the stream of questions about photography and computer science was supplemented by a flood of questions about the lawsuit. If I hadn't written this article I might have gotten RSI in my wrists simply from typing "no comment" 200 times every day.
Finally, there are customers who've adopted ArsDigita Community System to consider and friends that we recruited to work at ArsDigita, the company that made a profit every month. These folks have a right to a better explanation than they're going to get from a 500-word newspaper story or a corporate press release. The company's birth and growth were public, chronicled in Chapter 2 of Philip and Alex's Guide to Web Publishing. The folks who were kind enough to pay attention and support us are entitled to know how the rest of the story unfolds.
Board-level decisions were made not only without the chairman having an opportunity to vote but without the chairman (me) even being given notice. For example, after that final December 2000 board meeting, Allen, Ern, and the VCs (a) decided how much bonus to pay the CEO and COO for 2000, (b) named Jim Jordan to be Chief Financial Officer (see http://www.arsdigita.com/news/), (c) decided to eliminate me as Chairman and announced to the press that I was already gone (implying that I'd resigned though it was untrue), (d) hired and appointed Richard Buck as Senior Vice President of Engineering, (e) hired and appointed Dave Menninger as Senior Vice President of Marketing (again, see http://www.arsdigita.com/news/ ), etc.
What about the two outsider seats?At this point you might ask "Hey, what about those two outsider seats?" At various times during the rule of Greylock, General Atlantic, and Allen I would push for the nomination of someone with software products experience. Nobody was ever approved. On November 22, 2000 I emailed Bill Helman and Bill Kaiser, two other Greylock employees who'd pitched ArsDigita, trying to set up a meeting to discuss getting a couple of good outsider board members:
... As an investor in the company, though, I'm concerned that ArsDigita is
left without a single engineering expert on the board or on the
management team. I'm not sure what your experience is but mine is
that it is tough for tech companies to succeed without some
engineering expertise at or near the top. ...
They were reluctant to get involved, saying that normally everything should be piped through the Greylock employee actually sitting on a portfolio company's board, in this case Chip Hazard, the very person whose lack of engineering experience was contributing to ArsDigita's bleed. Kaiser agreed to meet me, however, after a couple of weeks. We walked around the MIT campus for 30 minutes. When I explained the problems with the product and the financials, Kaiser said "Isn't it possible that this is just your opinion, that Allen and Chip would see it differently?"
Relativism. It was impressive in a way to see Protagoras's sophism alive and well after 2500 years. But the "all points of view are equally valid and supported only by someone's opinion" ignores the fact that it is easy to measure the correctness of business beliefs: some people are losing money and some are making money; some companies are gaining market share while others are losing market share.
We gave up on the idea of finding any help from the Greylock corner.
With no voice in company operations and with a board seat in a company that did not have board meetings, it seemed that there was no longer anything that I could do to express the co-founders' wills as shareholders. Keep in mind that ArsDigita had been running in exactly the opposite direction from the way that we wanted it run. We started aD slowly and carefully. We ran it profitably. We placed small bets. We handled money conservatively (though we tried to give the appearance of wildness and fantastic prosperity to the outside world there is actually nothing extravagant about having a fancy beach retreat for a team of programmers that is excited and working 6 days/week, 12 hours/day). We made sure that we were working as hard as teams at Microsoft and startup companies.
By contrast, Allen, Greylock, and General Atlantic presented us (Common shareholders) with a strategy of "here's this spreadsheet that shows us going bankrupt in one year unless a big stream of license revenue starts coming in." And, oh yes, the revenue would be coming from a product that had never been built, purchased by customers to whom we'd never sold anything.
Do these kinds of risks bother venture capitalists? Having a first-time CEO with zero experience in the industry? Staking everything on a to-be-finished software product? Perhaps not. General Atlantic has $10 billion under management, according to their Web site (gapartners.com). If they point ArsDigita in a direction that leads to tankage, they can fall back on their $9.98 billion in other investments. What about the Common shareholders, though? We never signed up for this kind of risk and we don't have substantial other investments. I put 8 years of my life into ArsDigita Community System. Jin put in 4 years. We would be unhappy to see the company spend through its accumulated profits plus $38 million in capital merely so that three guys in suits could learn a little something about what it is like to run a software products company.
March 2001: The Final Shove March 2001 was a dark time from our shareholder perspective. Some of our greatest assets were pushed out the door. David Rodriguez, for example, a man who had worked like a monster and delivered huge projects to happy clients. Did he refuse to implement abstract URL on the World Bank knowledge management system until I nagged him via email from Australia? Yes. Did he say that ACS 4.0 was unusable? Yes. Did he tell Allen "You talk like a press release"? Yes. These things disqualify dvr from diplomatic service. But as shareholders we didn't like to see someone who had personally delivered more than $1 million in revenue while costing us perhaps $200,000 being pushed out the door. To a non-owner manager, it might make sense to get rid of someone who'd offended you with a harsh word. You're still going to get more than a third of a million dollars in base plus bonus, even if the shareholders take a beating. But as an owner-CEO I would let an employee vent his spleen at me, secure in the knowledge that at the end of the day this guy was building the value of my shares.
Our co-founder Aurelius Prochazka was also axed in the March 2001 massacre. Have Jin and I had to clean up some of his code in the past? Yes. Was Aure rather discouraged and unproductive in the past few months as ArsDigita's financial and market position slid and he reflected on the fact that unqualified people were managing the firm? Yes. Was Aure too quick to criticize highly paid executives whose intellectual abilities fell short of the standards he absorbed at Caltech? Yes. But what kind of a company can you have when you fire someone who is (a) a founder, one of the people who built a $20 million profitable enterprise on capital of $10,000, (b) someone who'd previously built a successful business and sold it, and (c) responsible for the innovative ideas and interface behind some of the ACS's most interesting modules (e.g., file storage)? Aure's PhD is in engineering and not in charm. But if shareholder value were related to average employee charm, Microsoft shareholders would be rather poor indeed.
So what were the shareholders doing in March 2001? Planning some research projects at MIT and Orange/France Telecom. Giving some one-day courses in Thailand and India. Revamping our Software Engineering for Internet Applications course at MIT (recently accepted by the faculty into the core curriculum and renumbered 6.171). In short, getting on with our lives and personal technical goals, working full-time for other companies. We cried if we thought about ArsDigita's financial performance but mostly we tried not to think about it.
Sing, O goddess, the anger of Achilles son of Peleus, that brought countless ills upon the Achaeans. Many a brave soul did it send hurrying down to Hades, and many a hero did it yield a prey to dogs and vultures, for so were the counsels of Jove fulfilled from the day on which the son of Atreus, king of men, and great Achilles, first fell out with one another. -- Iliad, Book I
Peter Bloom, the General Atlantic employee representing their interest on our board, was not crying in March 2001. He was angry, as he had been for many months. Though Agamemnon had not taken his prize girl Briseis to replace the daughter of the priest Chryses, Bloom's anger was not less than that of the great son of Peleus. My habit of pointing out that he'd accomplish more if he picked more important opponents (e.g., Microsoft and Oracle rather than a 37-year-old living in a 2-bedroom apartment in Cambridge) did not cool him down. What really sent him over the edge, as far as I can tell, was when I related my response to a member of the Harvard faculty who asked me what it was like to watch venture capitalists and professional managers run ArsDigita (I replied "like watching a group of nursery school children who've stolen a Boeing 747 and are now flipping all the switches trying to get it to take off").
Peter Bloom sent me an email message on March 28, 2001: "Since you are so troubled by the direction that the company has taken, you can choose to resign from the board before our next meeting. This is your decision to make, but it is a course of action open to you to avoid the public humiliation and significant professional impairment of being removed as Chairman from a board of directors. ... The actions you have taken and the written communication you have directed at individuals has now gotten you in very serious trouble and you need to turn to someone you trust for counsel. I sincerely hope that your trusted confidants will tell you the truth about the impending consequences of your recent communications and accusations before you irreparably impair your reputation and financial future."
Shortly after I received the email message, I stopped by ArsDigita HQ to pick up Alex from Eve. My card key no longer opened the door.
When a company with $10 billion in assets threatens "irreparable impairment of one's financial future" it is time to see a lawyer. So, thanks to Peter's initiative, I trundled down to see Sam Mawn-Mahlau and Paul Mahoney at Edwards and Angell. They prepared a "shareholder's consent" that would change the company by-laws so that, until ArsDigita went public, the CEO and president would be directly elected by the shareholders. The next item on the list was the election of Philip Greenspun as CEO. Another item in this shareholder's consent was to elect two existing vice-presidents of the firm, Tracy Adams and Eve Andersson, to the board. The stockholder's agreement said that the three insiders on the Board had to be "senior executives" so we promoted them to "Executive Vice President" just to be safe.
The effect of this shareholder consent was to trim the venture capitalists back to what they'd bargained for, i.e., two board seats plus veto power over major transactions.
Our shareholder vote happened to occur on the same day that CNET carried a story about how ArsDigita would henceforth abandon its open-source strategy in favor of traditional licensed software and how Philip Greenspun, the "former chairman", had left the company. The next morning, April 6, a courier arrived at 80 Prospect Street (ArsDigita HQ) with a letter for Allen notifying him that he'd been demoted from "President and CEO" to "President". I telephoned Allen to assure him that I didn't want to make any major personnel changes immediately, that I'd be happy to consider the entire last year as water under the bridge and work with him under our original agreement (I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business). I said that I wanted to spend the next few weeks just coming up to speed on the status of the product, the customers, and the company. Allen told me just what I wanted to hear and I was encouraged by the idea of working through him.
April 2001: Allen and the Venture Capitalists File SuitOn April 11, 2001, the following lawsuit was filed in Delaware chancery court: ALLEN SHAHEEN, ERNEST )
BLACKWELDER, GENERAL ATLANTIC )
PARTNERS 64, L.P., a Delaware )
limited partnership, GREYLOCK )
X LIMITED PARTNERSHIP, a )
Delaware limited partnership )
and ARSDIGITA CORPORATION, )
a Delaware corporation, )
)
Plaintiffs, )
)
v. ) Civil Action No. 18821
)
PHILIP GREENSPUN, EVE A. )
ANDERSSON and TRACY E. ADAMS )
)
Defendants. )
As you see from the caption of the case, the lawsuit was filed by Allen, Ern, the VCs, and the corporation itself. We were quite confused by the form of the case, given that this is fundamentally a dispute between two groups of shareholders (the VCs versus the founders). So we'd not expected the corporation itself to have any interest in the case one way or the other.
A conversation with ArsDigita Corporation's corporate counsel, Jay Hachigian from Gunderson, shed some light on the matter. It seems that Allen dipped his hands into the company checking account and scooped out a quarter million dollars to pay the venture capitalists' attorneys in this matter. Jay cautioned the group that this was perhaps not the best idea but they apparently went ahead anyway. Thus we now have the spectacle of a group of shareholders trying to increase the level of accountability of a management team who has, in their view, been doing a bad job. That group of shareholders is being sued by the managers who want to avoid accountability. The lawsuit is being funded with the defendants' own money!
The crux of the plaintiffs' case is that Jin and I signed various agreements promising to do various things, e.g., always vote for a Greylock and General Atlantic representative on the board. The closing documents for our financing formed a stack about the size of a Manhattan Yellow Pages. Supposedly somewhere within this stack it is said that the Board of Directors of ArsDigita won't amend the corporate by-laws without the consent of the venture capitalist members. Nowhere does it prohibit the shareholders from doing this, however. Greylock and General Atlantic would like to read this interpretation into the documents. If memory serves, those documents were drafted by Paul, Weiss (paulweiss.com), General Atlantic's lawyers. So under standard legal doctrines, ambiguity ought to be construed against them. Of course, I'm not a lawyer and nobody can say what another human being, in this case a Delaware judge, is going to do. I personally think it would be a bit shocking for the judge to rule in favor of Greylock and General Atlantic. The effect of such a ruling would be to make the shareholders' voting rights worthless, i.e., the judge would be saying that the VC firms could exercise absolute power forever as if they'd bought the voting rights on our Common shares at the time of the investment.
So, that's the story. Keep in mind that most of what is in this document may well be irrelevant to the outcome of the lawsuit. A court generally does not want to decide which group of people is likely to make better business decisions. A court looks at issues such as "What rights do the owners of a majority of the shares of a company have to control its direction?" or "Can the venture capitalists add extra restrictions, a year later, to an agreement that they made and that is reflected in documents drafted by their own lawyers?"
It will take a couple of months to take everyone's deposition and get through discovery. Then we'll have a trial, maybe in June 2001, in front of a judge in Delaware. The judge might decide the case based on just a few documents, in which case all of the discovery will have been a waste of time.
Why I wrote this Generally people try to say as little as possible during litigation. However, I've been getting progressively more and more annoyed listening to other folks' characterizations of the lawsuit. ArsDigita management was running around the building telling folks that "Philip sued the company", something that was plainly false. Allen was telling people "the venture capitalists have a very strong case" (how come he needed to pay a retainer of $250,000 of the shareholders' money to defeat a couple of individuals if the venture capitalists have such a strong case?). Reporters were making it sound like this was a dispute about ego and control. In a way that was true; Allen, Chip, and Peter did not like being characterized as fools whose ignorance was costing the company $millions. But as far as Jin and I were concerned, the reporters' spin was not true. We'd have been delighted to be passive shareholders in a successful profitable company. What we didn't like was being passive shareholders in a company bleeding cash.
There were some simple practical motivations for writing this article. One of the beauties of the Web is that it can save one from having to repeat oneself. On any normal day, I get 50 email messages from readers of photo.net and philip.greenspun.com asking various questions. A few times every week, a reporter will email or telephone to ask a question. After Greylock and General Atlantic filed suit, the stream of questions about photography and computer science was supplemented by a flood of questions about the lawsuit. If I hadn't written this article I might have gotten RSI in my wrists simply from typing "no comment" 200 times every day.
Finally, there are customers who've adopted ArsDigita Community System to consider and friends that we recruited to work at ArsDigita, the company that made a profit every month. These folks have a right to a better explanation than they're going to get from a 500-word newspaper story or a corporate press release. The company's birth and growth were public, chronicled in Chapter 2 of Philip and Alex's Guide to Web Publishing. The folks who were kind enough to pay attention and support us are entitled to know how the rest of the story unfolds.
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