From Green Fields to Forest Fires

Guy Kawasaki, managing director of Garage Technology Ventures, interviewed some insiders on Silicon Valley's relationship to the global economy at the Silicon Valley 4.0 conference a few months ago. This session was called From Valley View to World View.

Kawasaki: Irwin, I'd like to start this question with you. What demographics of the world are changing? This is an audience primarily of entrepreneurs. Do you see particular areas that are still exciting, still sort of green fields that USVP would be interested in or you think they should be looking at? Not making the 16th router that's going to compete with Cisco but other things?

Irwin Federman: Mr. Federman is a general partner at US Venture Partners. I'm not a visionary. Our job is to find visionaries and to back them and help them do what they do. It's never been obvious to me that there's a green field. In all the years I ran a semi-conductor company and worked in VC, I suspect that if I did discover a green field, I wouldn't have told anybody. But what seems to occur cyclically is that as industries or as segments mature and consolidate, their focus on what they're doing is such that their ability to come up with the next best thing is diminished and it just goes on and on. In that lies the ultimate optimism.

Intel, certainly an icon, a beacon for the semi-conductor industryóthe largest semi-conductor company in the worldóhas processed technology that's moving toward being two generations ahead of the industry. It's acquired companies in order to enter new markets and almost without fail, they've gone nowhere. Intel is making a very serious effort in the WiFi area today, and I'm not prognosticating failure there, not even close. But basically, the company is a processor company narrowly based, even though it's acquired companies in a broad range of other areas that is wanted to participate in and just couldn't get a go. But it's a very innovative, resource-rich, terrific company.

I think VCs don't have to find green fields. You just have to find holes in markets that have developed to a very large size and wedge your way in and build something of consequence.

Aaron Gershenberg: Mr. Gershenberg is a managing director for Silicon Valley Bank. I think it's pretty well said that by the time you know there's a wave, it's too late. You've got to be in the water paddling if you want to catch that wave. You want to cover as much ground as possible within your domain of expertise. You want to find where there's real solvable pain. But you've got to be willing to throw yourself in danger's way so that there is true innovation and [solution].

Craig Johnson: Mr. Johnson is chair and cofounder of Venture Law Group.Sometimes you have green fields, but they are the exception. When I say green fields, I mean sometimes there is some fundamental technological scientific innovation that spawns a whole new industry, and it has to start somewhere: the Genentechs, the Spectra-Physics, the laser companies. Something happens that makes possible something that never happened before the invention of the transistor and the semi-conductor.

But 98 percent of the companies that I've worked with that have succeeded have pursued an incremental path, as Irwin said. They basically have their experienced teams that see a better way of doing something, and they're not getting necessarily the support or enthusiasm from their current employers, and they want to go off and do something their own way. They're incrementally improving something that they already know very well. I think that's the way most progress is made: hard work one day at a time and not radical leaps and jumps.

I think this climate is perfect for that kind of situation, because entrepreneurs are thinking incrementally. They're much more risk adverse. Capital is slower to fall, and people are not swinging for the fences as I think they were doing three or four years ago.

Kawasaki: Joseph, I'll alter the question slightly for you. These fellows are looking at it from an investor's perspective or a service perspective. Pretend that you don't work for the United Nations anymore, and you have all this knowledge of demographics. What would you do? What kind of company would you start?

Joseph Chamie: Mr. Chamie is the director of the population division of the UN's Department for Economic and Social Affairs. Interesting question. I grew up in Detroit, and I'm part of the baby boom, right at the beginning. Lee Iococca introduced the most successful automobile for Ford, the Mustang, at the point when the baby boom was entering the driving period. Bucket seats are out now, but Lee Iococca knew the demographicsóyoung people coming in. Pepsi knew it as well, and Pampers knew the diaper business.

So what is happening demographically that would lend [me to investing in] certain types of industries? We're getting older. People want to color their hair. People want to keep their hair. Women are working; they want comfortable clothing and comfortable shoes. People are getting older. If you look at the Gore-Bush debates, two things kept coming up: health care and pensions. Everywhere you look, there's a headache with health care and pensions. Those are growth industries.

You're all going to live longer than you think, and you'll need aids. Right now, good investments: Pampers for adults.

Kawasaki: There was a recent study in England that said that high heels are good for strengthening women's knees.

Chamie: The number one complaint that women have when they're surveyed: complaints about their feet.

In many parts of the world, people are not marrying. They are cohabiting; civil marriage is growing. But it's changing child bearing, reproduction. Reproduction, fertility, mortality, health, death, morbidity, and migration: that's the entire equation determining population change, and we've had changes in all of them that are remarkable. In Canada, less than 50 or 60 years ago, women were having seven, eight children on average. Now they're down to less than two.

Europeans aren't replacing themselves. What we're having is a very, very serious low fertility problem for the Europeans. In 1945, Europe represented about 25% of the world's population. Today they're at 12%, and by 2050, they'll be at 7%.

I make projections. It's easy. All the elderly by mid-century are already born. If you're living longer, you're going to have more leisure time, and you're going to have many concerns, and I would still invest in hair coloring, comfortable shoes, and Pampers for adults.

Kawasaki: An entrepreneur I think is most likely to be younger and can least relate to those three problems.

Chamie: Mothers are working. They want to know where their kids are. Cell phones are a big help. Maybe in the future they'll have chips [that tell you] exactly where your kids are. You can monitor them on your little handheld computer. Keep in mind what's changing in the labor force. People are changing, and the technology is following them as much as they're following the technology.

The world can be divided in four main domains. One is technology. That's your business. The second is environment, the fish between oysters and sirloin. The third: social organization, politics, economics, religion, and culture. The final one is what I'm in, population. All the people and their demographics and functions. Take these into account, and you'll be much further ahead than the entrepreneurs who are not sensitive to demographics.

Kawasaki: Craig, I'll start this question with you. In the Valley, we look at the icons. What is your take? For example, Sun: Does it have a place in the world? What's going to happen to the Suns, the SGIs, the Apples? What happens to these companies? What they can do? Is the game over? Where are these companies?

Johnson: I think that the entrepreneurial community parallels nature. I think you grow, you get bigger, you get slower, you age, and often you die. Large companies that want to survive over the long termóalthough they don't often realize itóhave to reinvent themselves over and over and over again. You saw that with IBM and Gerstner, for instanceóin the 90s where he largely transformed IBM from a hardware business to a services business and where that was driving much of the growth and the revenue.

I analogize it to the redwoods in the forest that fall and decompose, and what do you know? You see a whole bunch of new little redwoods sprouting up little saplings, sprouting from the king redwood of the giant sequoia, and it's just part of nature. Getting a startup started is difficult, but running a really large company and remaining innovative and turning it around and reinventing it is even more difficult.

So my hat is off to companies right now in the middle of that process. I think Xerox, for instance, is one. I think Sun as a relatively young company is having its own challenge, but it has reinvented itself at least four times before, and it's on to the next stage.

It is a very Darwinian environment. The names you mentionedóApple, Sun and othersóare the survivors, but think of the companies that aren't here. I'm not saying it's bad, because I think it's a natural process of regeneration.

Kawasaki: Using your forest analogy, a forest fire is in effect good for the forest. In a sense, that's what we just went through.

Johnson: Yes, that's a good example. I think the equivalent of a forest fire for us is the subtle changes that Irwin mentioned, where you go through some kind of macrocosm economic disaster that shakes everyone to their foundations and shakes out the entrepreneurs that really aren't committed. That has to happen from time to time.

Federman: My thoughts track very closely to Craig's, but I would just put an additional spin on it. In nature, there's a 2,000-year-old sequoia and a 100-year-old Monterey pine, and those are their natural lives. Our notion about the natural lives of companies perhaps is still viewed with the notion of companies that are household words such as GE that kind of last forever, and that's not in the nature of things.

I think it's perfectly possible, acceptable, and terrific to have a successful company that lasts for 10 or 12 years. What's wrong with that? You're not signing a pact with God that you're going to be here forever. You do your thing. If you can't morph it into something else, you sell it or you dissolve it. One can be successful in terms of reaching one's objective and being rewarded for it within a finite period of time.

I was involved in a startup years ago called SanDisk. And now that company is the leading provider of digital film and portable digital storage. It's going to be a billion-dollar company according to the analysts.

A few years ago, we sat around the board room table dreading a call from Kodak. We thought they were going to see the rise in digital photography that was just entering its very nascent stage and swoop in and make us an offer we couldn't refuse, and it didn't have to be that large. They could have snapped it up, and they never made the call. They never made the call that Gerstner made at IBM.

Just the other day, we were, not shocked I guess, but just so surprised that they announced to the world that they're not going to make any future investments in celluloid film. Perhaps you saw that announcement by Kodak and that its future lies in digital photography. Now talking about missing the train. If companies are going to have a long life, they're going to have to take advantage of their perception of the change in demographics, the change in technology, and adjust themselves accordingly, because the same old formula ain't going to work going forward forever.

If you have a good idea about solving a problem you perceive as going to manifest itself in a couple or three years, go for it if it's a large enough market, and then along the way, you may be able to figure out how to grow from there. The markets in the electronics industry have become very large indeed, and years ago companies weren't funded because they were perceived as a product and not a market. That has changed. Some single product ideas now are serving markets that are very large, and a product can be a company. It's up to you from there.

This material was excerpted from the Silicon Valley 4.0 conference, hosted by the Churchill Club and Garage Technology Ventures. Guy Kawasaki led the discussion with Joseph Chamie, director of the population division of the UN's Department for Economic and Social Affairs; Aaron Gershenberg, managing director for Silicon Valley Bank; Craig Johnson, chair and cofounder of Venture Law Group; and Irwin Federman, general partner of US Venture Partners. Part five of five; see part one, part two, part three, and part four.