Queen Isabella's offer of three ships in exchange for half the gold and spices Columbus could bring back was an offer too good to refuse. And so it is for Silicon Valley start-ups, which, if they've got the right stuff, can get venture-capital funding with tempting ease, say VCs who formed a panel at the Society of American Business Editors and Writers conference in San Francisco on Thursday.
With all the "friendly" banks, real-estate developers, office suppliers, and the like, Silicon Valley is "built to start companies," said John Warnock, chairman of San Jose-California, based Adobe Systems, which runs its own mini venture fund.
"This place is an engine to foster creativity," Warnock said. "It happens at a real velocity here that's unlike anywhere else."
And that's what keeps the cycle going - venture-capitalist optimism funding entrepreneurial optimism. That and a high margin of return on investment, which allows payoffs from one successful venture to cover many a failed prospect in the very risky business.
Mark Gorenberg, a partner with venture firm Hummer-Winblad, said one of the early indicators of a winner is how well the employees work as a team. "You look at them and ask, 'Can this team attract more excellence to the team'?"
Risk reduction was mentioned as one of the primary goals for young companies, which in this case means that with every round of financing it seeks, a company needs to prove there is less risk in the investment. Prove you're more valuable, and more money will come. On the other hand, overfunding can be one of the biggest pitfalls for start-ups, Gorenberg said. Many burn through money a lot faster than they create products that make them a valuable business worth taking public.
Above all, the panelists agreed, marketing is the name of the game, and probably the most important tool in staking a claim in the computing industry. "Marketing is the hardest part," said Gorenberg. "Do you position yourself, or let your competitors position you?"
The panel also pointed to the emergence of publicly funded VC funds as one of the more significant trends of late. Both public companies and independent groups of investors are seeding more and more money to start-ups. Knight-Ridder, for example, recently formed a VC fund that invests in other media and publishing groups.
Adobe Systems was the pioneer of this area. When it started to accumulate lots of available cash, Adobe decided to become a modest venture firm itself. "If you can't spend it on yourself, why not start a venture fund?" said Warnock.
This type of "corporate venturing" has been picking up as companies realize that investments in related technologies can pay off twofold - in returns from stock shares, and in the synergy that is created between the two companies' products.
"We get leverage in vertical markets that we otherwise would not have," Warnock said.
Of course, Adobe's cash return is nothing to sneeze at either: After an initial investment of US$40 million in 1994, Adobe's VC fund is now worth $175 million.
By critiquing business plans and offering advice on how to develop successful products, Warnock said bigger companies can act as mentors to young start-ups. When Adobe invested in Netscape early on in the game, it lent some needed "technical credibility" to the company, Warnock said, taking a bit of credit for bolstering Netscape's early prospects of going public.
Not all start-ups have had the remarkable success of Netscape, though. Tim Draper, a partner in venture firm Draper Fisher Jurveston recounted the story of one company that offered all the promise in the world, but ended up "a spectacular disaster."
"We seeded them, and then he [the founder] raised another $20 million from others and stopped listening to us. He spent the money immediately," he said. After hiring some 200 employees - "the entire graduating class of the Stanford business school was there!" - a product was still nowhere in sight. So when the company ran out of cash, it came to the VC trough for a second helping. But this time, the trough was empty.
Like Columbus, start-ups need to turn up some spice before the Queen Isabellas of the Valley will hand them more money to explore new worlds.
