Confessions of a Venture Capitalist: Inside the High-Stakes World of Start-up Financing

by | Dec 14, 2000

I referred to the magic of Silicon Valley. That magic-an intoxicating mix of money, imagination, and inspiration-had its origin in the semiconductor boom of the 1970s, when dozens of companies seized on possibilities made ripe by Intel’s development of the first microprocessor. Millions of dollars were generated, new industries were born, and a hilly strip […]

I referred to the magic of Silicon Valley. That magic-an intoxicating mix of money, imagination, and inspiration-had its origin in the semiconductor boom of the 1970s, when dozens of companies seized on possibilities made ripe by Intel’s development of the first microprocessor. Millions of dollars were generated, new industries were born, and a hilly strip of land south of San Francisco, land that was once home to a sprawling patchwork of orchard groves, became popularly known as “Silicon Valley.”

Today Silicon Valley feels like a bubble. I should know: We venture capitalists live, work, eat, drink, and schmooze right smack in the center of that bubble. And so do most of the entrepreneurs.

The word “bubble” conjures different images for different people. Some may think of soap bubbles–translucent and beautiful, but fragile and short-lived. Others may think of the rich and famous, always caught in the fishbowl, or even of closed-environment bubbles like Biosphere II, where people try to recycle air and live off of their own waste products.

Silicon Valley is something like all of these bubbles. It is an enclosed, wealthy, fragile yet beautiful, breathing-its-own-fumes kind of place. And it is no exaggeration to say that there is no other place on earth quite like it.

There is a kind of bull’s-eye target effect at work in the geography of Silicon Valley. Entrepreneurs live and work in towns and developments ranging all the way from San Francisco down the Pacific coast to Monterey. Venture capitalists, the keepers of the capital that fuels the Valley, generally live within a twenty-mile radius stretching out from Stanford. But the financial ground zero of Silicon Valley is a single street, the one street where almost all the venture capitalists work: Sand Hill Road in Menlo Park.

Sand Hill Road, which lies on land owned by Stanford University, runs close by the idyllic, palm-tree-lined Stanford campus. A wholly unremarkable road lined with low-slung buildings, gently sloping hills, and scrub brush, it begins with a riding stable and Christmas tree farm on the west side of Interstate 280 and runs for about three miles east before ending unceremoniously in the parking lot of the Stanford Shopping Center.

It’s difficult to picture tycoons of finance and technology making deals in such a tranquil-looking setting. But dozens of venture capital firms line this street, representing some of the most powerful investors in one of the most influential businesses in the country. Some of the firms on Sand Hill Road–firms like Kleiner Perkins, Mayfield, Sequoia, and IVP–have name recognition of their own. Even better known are the names of companies that Sand Hill Road venture capitalist have invested in: Sun Microsystems, Netscape, Cisco, Intel, Apple, Excite, Yahoo! These companies are changing the way the world computes and communicates, and many got their start with assistance from Sand Hill Road venture capital firms. In any given year, the venture capitalists on this stretch of road might collectively represent as much as $10 billion worth of investable capital.

The mere words “Sand Hill” now hold an almost mystical meaning within Silicon Valley. The road has taken on a persona of its own: in the Valley you will hear people say, “Sand Hill thinks like this,” or “Sand Hill didn’t go for that idea.” Being part of the so-called Sand Hill crowd, you can sometimes forget that the rest of the country–not to mention the world–may not be in on the reference.

I was once asked to address the leaders of the National Association of Broadcasters at Pebble Beach in Carmel Valley–a mere hundred miles from Silicon Valley. The title of my speech was “A View from Sand Hill.” Trouble was, nobody knew what I was talking about. I spent the first ten minutes of my one-hour talk explaining the concept to them, which was a new experience for me. Explain what Sand Hill Road is? I had been living in the bubble so long that it hadn’t occurred to me that people outside it might not know what I was talking about.

Silicon Valley is a place for people with ideas. It is a place where the right idea at the right time can yield remarkable returns for investors and entrepreneurs. It is known, rightly, as a place of simmering, sometimes spouting, creative enterprise.

How ironic, then, that the venture capitalists who nurture this creativity aren’t more creative in their choices of where to meet, eat, and mingle. The best example of this is the phenomenon of the Silicon Valley breakfast. Breakfast is a prime time here for discussing potential deals. Everyone–and I really mean everyone–in Silicon Valley goes to one of three restaurants to do this: Buck’s in Woodside, Il Fornaio in the heart of Palo Alto, and Hobee’s in the Town and Country Shopping Center in Palo Alto. Same restaurants, same faces, everyone sitting within earshot of each other, bolting coffee and interviewing entrepreneurs.

Take Buck’s, for example. It’s your basic family-style eatery, with brown leather booth seats and green Formica tabletops. The walls and floors are covered with kitsch–cowboy boots, giant stone turtles, dinosaur models–and the last time I was there, there was a glass case on the counter displaying the latest book on Silicon Valley by long-ago Apple evangelist Guy Kawasaki. The menu is your basic breakfast fare (the pancakes are great; I get them every time), save for the occasional item, like the nonfat organic omelette, that indicates you’re in California.

All kinds of people come to Buck’s–entrepreneurs, parents with kids, graduate students from Stanford, guys in pickup trucks. (Of course, Buck’s is in the upscale suburb of Woodside, which means that the pickup trucks are fancy, freshly painted, and driven by people who own horses and lots of land.) And lots and lots of venture capitalists and entrepreneurs.

Think about this behavior for a moment. Venture capital feels like one of the most competitive businesses on earth: at the extreme, it is a lot of money chasing a few good deals. Yet we venture capitalists and entrepreneurs stick together like a roving band, working and eating at the same places, staying in one another’s orbit. Many times I have sat in one of the brown leather booths at Buck’s and overheard things that I should not have heard–about corporate mergers, or the potential firing of an executive, or just some juicy gossip–all the while munching away on my pancakes.

What is it that makes us all want to be so much together? I’ve got my own theory. Venture capital is hard. It’s stressful. It’s lonely. Decisions that you help to make may lead to millions of dollars of loss or profit for your firm–to say nothing of the lives of people whose jobs partially depend on what you decide. In such an out-on-the-edge environment, where at any given point in time you are always wrong about something, it probably just feels better to be with other colleagues in a similar situation.

The managers of the companies that we fund marvel at this herding behavior. But in their favor, the venture capitalists’ proximity to one another makes the entrepreneur’s job of raising money easier. An entrepreneur can schedule numerous meetings–sometimes up to four in a row–for one day, and just zip up and down Sand Hill Road to get to them. I can’t tell you how often entrepreneurs make sure to drop hints that they’re seeing other venture capitalists. They announce breathlessly that they can’t stay long because they’re scheduled for a meeting just down the road, or they apologize for arriving late because they’re coming from a meeting just up the road.

Sometimes we invest like a herd too. A notion will sweep Sand Hill that a certain type of company is hot, and five or six of these companies will suddenly materialize and come knocking on our doors within a single month. They will more than likely all get investments–after all, nobody wants to get left out of the Next Big Thing (which you’ll read about at greater length in another chapter).

But this herdlike investing is inherently dangerous, sometimes resulting in whole categories of companies with markets that never quite take off. Consider, for example, Internet “push” companies, which were supposed to change the way we got information online by delivering information directly so the customer didn’t have to spend time searching it out. This market soared on momentum as excited venture capitalists pumped money into it. The venture herd surged forth, and lots of companies got lots of money. By the mid-1990s, more than thirty “push” companies had reportedly been started. But hype, momentum, and the herd mentality do not guarantee success in a market. After about eighteen months the momentum fueling the “push” phenomenon fizzled.

One more defining characteristic of life in the bubble is the astonishing degree to which everyone–and I really do mean everyone–is tuned in, wired, or tied in to the communications revolution going on. Cleaning ladies carry cell phones. High schoolers carry pagers. People stand in line at the grocery store and debate the merits of Yahoo! versus other Internet search engines. In Silicon Valley, the threshold of awareness of the latest industry innovations and trends is exponentially higher than in the rest of the country.

This is one of the key ingredients of the magic I mentioned earlier: Silicon Valley is a place where the extraordinary is ordinary. It is a place where things not yet seen or dreamed of by most of America are already commonplace–or even outdated. It is an atmosphere in which entrepreneurs, investors, and inventors push one another to ever higher peaks of creativity.

But as remarkable as this atmosphere might be, it has been fueled even more by the sudden emergence of an exciting new technology: the Internet.


Ruthann Quindlen directed the IPOs of Microsoft, Borland, and Broderbund, among others. She lives in Portola Valley, California

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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