Silicon Valley Deconstructed With Tom Perkins and Don Valentine | Disrupt SF 2013

Welcome. So I've been really looking forward to this. You know, you two are like the godfathers of this industry. And it's not every day that an audience like this gets to sit down with people who've seen the evolution of Silicon Valley from the beginning. And I'd be willing to bet that every single person in this audience has been impacted by the companies that you first backed and helped develop. When you come to an event like this and you see this standing-room-only crowd, what goes through your mind?

Well, TechCrunch is owned by AOL, which is the company we started. Right.

So here we are. I'd just like to say something about what venture capital is. And everything I learned about venture capital, I learned from David Packard of the Hewlett-Packard Company. Now, he's obviously a great entrepreneur, he and Bill Hewlett. They did projects within the company in which each project had to make a contribution of at least a factor of 10. So they sought high risk. They managed it carefully. They got rid of the risk up front, and then they poured in the money. And that is the fundamental lesson of venture capital. And Packard was such an entrepreneur himself that while I was starting and building the computer business for Hewlett-Packard, which has done pretty well, he let me start my own company in the laser business.

Before I came along, the laser was kind of a laboratory curiosity. I figured out how to make it like a light bulb. Cheap, worked, or it didn't, you threw it away. And Packard let me do that as a moonlighter while I was working for him. And when it was successful, he slapped me on the shoulder and was so proud of me. So he was the mentor that I needed and I learned everything from him.

And is that why you went into venture capital? I'd love to hear from both of you why you decided to create this industry.

I would like to correct the record. I came a thousand miles to be here from Montana only to be identified with a major criminal. I mean, the Godfather is not an image that I hope my grandchildren recognize. And we're running out of horses' heads. I wanted to talk about the Yellow Brick Road that Sequoia Capital has been on. A startup company I joined in 1959, Fairchild. The word Silicon Valley hadn't been created yet. This was a company that had extraordinary technology and one fundamental issue. There were far more customers who wanted special things done in silicon than we could handle. So we had to divine and invent an analytical system for choice. And the choice was based largely on the size of the market, the nature of the application that we were going to turn into silicon, and we used, in an evolutionary way, we used the same process of evaluation at Sequoia.

We wanted to have a very narrow focus, highly customer-sensitive system of selection. And I'll just pause to get Tom to give equal vision about Kleiner Perkins.

Well, we, when Kleiner and I started it, we made some really funny but rather stupid investments. I will confess. The worst one we did was an idea to convert a motorcycle into a snowmobile. And it was called, I'm not making this up, Snow Job. And I spent a couple days on it up in the Sierras, and I thought it was just terrific. But the customers didn't jump for it. So we were really not doing very well at all in the venture business. And Eugene and I decided maybe we will just have to do it ourselves. So we started a company called Tandem Computers, which is now the top end of the Hewlett-Packard computer line after a couple of mergers, with Jimmy Treybig, who worked for us as a partner, and we put it together in our office.

We financed 100% of it, and it was a huge success.

How much did you put into Tandem?

Oh, gosh. I don't remember numbers that well. About, I think, about a million and a half, which was a very significant portion of our fund. Our whole fund was eight million. We wanted 10, we couldn't raise more than eight, and we had the largest fund in the world at $8 million.

And Don, how much was Sequoia, how much did you guys start out with?

Largely the same size number, but I think the perspective that you need is venture capital hadn't been invented yet. Fairchild Semiconductor could not raise money. 25 organizations turned the company down for financing. And Tom and I agree that at the outside, maybe $50 million nationally was the available pool of money to finance new companies, and that's in the early 70s. So it's a very, very small world, and it hasn't been named yet. Back to you, Chet.

What was your first investment?

Our first investment was a company called Atari, a game company made with silicon and made with microprocessors, which in our experience is the key decision we made, which was to finance microprocessors. The patent for microprocessors came from Fairchild. So I followed what I thought was an insight to the future and financed everything moving that was made with microprocessors. The key benefit of all of the success of Atari: they had a junior employee about 18 years old whose name was Steve Jobs.

Tell me what it was like meeting Steve Jobs. I know you passed on Apple, right?

Yes, we did. Kleiner and I had looked at about three kit computer companies. We were very unimpressed, and we very foolishly didn't even look at Steve and Wozniak. Big mistake. Don has focused, as he explained, much more on silicon as his route. We were a little more diverse. Genentech was a huge breakthrough for us, and that was in our first partnership. And we felt that we hadn't just created a company, but we had probably created an industry. So we invested in many other things in biology, most of them very successful. And looking back on everything I've done, I think Genentech is the company I'm most proud of. It was a huge financial success, but we've saved thousands and thousands of lives, which is good.

Definitely. So going back to Don, what you were mentioning about Steve coming from Atari, what was that first meeting like? Did you meet him through the CEO of Atari? How did that work?

Without exaggeration, I would say that every meeting with Steve was a showstopper. At age 18, undegreed, and not the technical side of Apple—that was Wozniak—Jobs was able to craft questions that got to the heart of whatever the problem was and exploit the deficiency in the competitor's product as well as employ the best and most technically developed silicon. Sequoia has been very LinkedIn—and I've been waiting all night to use that word because it's an investment we made several years ago, which is yet another spectacular company in Silicon Valley's lore. LinkedIn: if you're not in, join. So much for the advertisement. We were a very, very narrow silicon microprocessor investor. And in both Apple,

as well as many of our other companies like Cisco, we made approximately 10 investments. We viewed Apple as an aircraft carrier. Its first memory system was hideous. It was an audio tape cassette. Nothing was slower, nothing was more unreliable, so the obvious investment that had to be made was a disk drive company. IBM was very compliant. They opened their disk drive company in San Jose and made Winchester disk drives there, which were liberally used and taken advantage of by the entire community.

When you look back at all the entrepreneurs that you've invested in, Steve and many, many others, what's the consistent thread with all of them? Do they all have something in common?

There's always been a debate of what's the best investment. Do you invest in an idea or in a person? And that debate goes on forever. I feel you invest in the idea because bad people don't have good ideas. So it's a very simple formula. And when I used to look at business plans, I would look at the back pages, and if the numbers were big, I'd look at the front to see what kind of business it was. And pretty sophisticated. I've backed Harvard Business School graduates, which Don refuses to do.

Oh, I'm very discriminating. I'm against all business schools. So I'm

So I'm not, and we've backed some very successful companies from business school graduates. But we've also backed a company called Acuson, which is now part of Siemens. It became a New York Stock Exchange company in ultrasonic scanning. And the president of that company had never had anyone work for him, anyone. He was purely a technician, not even an assistant of any kind. He wrote a business plan about the size of a New York telephone book. I mean, it was just incredible. He sent it all around and, of course, nobody really jumped at it. And I invited him up to the office and we talked about acoustical diffraction. I knew something about optics from my laser experience. And I decided we're going to finance this company.

And he said, "But you haven't read the business plan." And I said, "Well, do I have to?" And we financed it. New York Stock Exchange, it was a great company. And I learned a lot from him about management. So we've covered the whole spectrum.

I have an answer to a question that hasn't been asked.

Go ahead.

and this is a rehearsed question and answer which tom and i contrived at lunch over a glass of wonderful red wine i had to restrain him from ordering a whole bottle we financed the company and went on the board jointly an international semiconductor expert very proud and fairly successful and we need what we thought was a fair deal company made some progress and had to raise money once again and the founder president had an idea of what the valuation would be and it was rare for both of us to be knocked out of our chairs by the number of proposed tom to be outbid said, that's impossible. He's always been in favor of strong verbal support. And I was stunned by the dialogue developing. Tom, not to be outdone, said, you raise a consequential amount of money at that price, we'll build a statue to you in the courtyard of the company.

I knew I was in deep water now. Tom only operates on a grand scale. So I sort of chipped in and said, "He'll do the statue, I'll supply the gilding, and we'll have a gold statue of you." Your story.

He did actually hit his numbers, right?

He did it. So he did it. So I went to Chinatown, and this individual—I think we can say his name, Wilf Corrigan, great entrepreneur—but he was kind of bald and he had a tummy. And he looked a little bit like a Buddha. So I bought the biggest, ugliest Buddha I could find in Chinatown and then spray-painted it gold, and we presented it to Wilf, who at the time didn't think it was very funny. Now I think he thinks it's hilarious.

So I want to talk a little bit about board meetings. So Tom, your former colleague, Vinod Khosla, was up here earlier today, and he said that—and I'm paraphrasing this slightly—that 90% of investors don't really add value, especially at board meetings. He doesn't even go to board meetings very often because he just finds them a waste of time for the entrepreneur. You have both been pretty instrumental on a number of very well-known, successful company boards, and I'm really curious to hear your perspective on how you guys have added value at the board level.

Well, I think we both have opinions. And I don't know if we'll agree on this or discuss this. I think in the beginning, the board should be very small. And in Silicon Valley, typically, the chairman of the board is the venture capitalist. So at one time, I was chairman of 14 boards at the same time, three of them on the New York Stock Exchange. But as the company grows, you need more insight—more insight into, let's say, Europe or the consumer market or something you really don't know much about. And I was very lucky, for example, to get Walter Wriston, former chairman of Citibank, and George Shultz, former Secretary of State and Defense Department director, onto the Tandem board. And they made an enormous contribution.

So I would disagree with Vinod on that point. Don, I'm sure you have insight here.

Despite the opportunity to disagree with Vinod, which is always a distinct pleasure, I would rather tell you a real happening, which is highly unlikely. Atari was right up there among our early and first investments. And it was started and run by an extremely unusual and aggressive founder. These were electronic games. And the thing that was distinct about our board meetings: they were conducted in a hot tub, with all the directors dressed appropriately for a hot tub.

Where was this hot tub? Was it at Atari?

It was in Nolan's house. And he was a very thoughtful founder. He had some bad wine floating around in the hot tub in case refreshment was required. So this is a world that had a lot of humor involved and opportunities to do things differently. And since I've always believed that the key to making great investments is to assume that the past is wrong and to do something that's not part of the past, to do something entirely differently. And the last thing I'll tell you on this broad point is when I hired or participated in recruiting people, John Morgridge, for example, the president for a long time at Cisco, I asked him a question that I had asked to prior candidates. I asked, 'What was the most outrageous thing you've ever done?'

Knowing in my heart of hearts that whoever was the most outrageous, I would choose. Several people said, 'Well, I've never done anything outrageous.'

They were shown the door.

Quickly. I didn't want them drinking my wine and wasting my time.

Do you feel that VCs should be operators? I mean, you both came from entrepreneurial and operating backgrounds. Do you feel that in order to be good VCs, you have to have founded a company, been in the trenches?

Yes. Yes.

What makes a good VC?

Judgment, which comes from experience. Having been through tough things and gotten through them and solved the problem. Daring and tremendous ambition. I think it's tough for a company if the CEO is not as ambitious as the venture capital backers. Don?

At the risk of being repetitious, I will not be. For me, it's the one thing that I would add to Tom's list: the ability and willingness to be different. Great companies are built with different products by different people. People who—and I've been asked to get this plug in—the last person, those of you in the audience that are founders and entrepreneurs you want to hire, the last person is the HR person. They're the destroyers of companies. They're the ones that write the binders and tell you what the rules are and how much everybody gets paid in grade seven. If they attempt to be employed by a great company—Wozniak of Apple attempted at one point in time to be employed by Hewlett-Packard.

Well, Woz didn't present the way a Hewlett-Packard person looked. And he was therefore unemployable.

I would just add: start the company if you're the CEO. Start it by yourself. Don't try to build a complete team first because you're not going to get great people to work for a high-risk startup. So get it going yourself with the help of a good venture capitalist like you see here before you. And then build your team, and you'll be... For example, when we started Compaq Computer, the president wanted to—he had a marketing candidate in mind, and we said, "Forget it. Let's get it going, and then we'll hire the vice president of marketing of IBM," which is what we did. So that's a tip.