Why do so many wanna-be entrepreneurs like Scott Rozic, founder and CEO of XMarkstheSpot, head for Silicon Valley? The reason may seem as obvious as why Willie Sutton robbed banks—because that's where the money is. But it's really more complicated than that.
Biologist Garrett Hardin coined the phrase "tragedy of the commons" to describe a system in which people acting rationally and in their own self-interest destroy the very resources they all share for their livelihood. His original example was of colonial farmers. Adding sheep to a flock grazing on the town commons made sense for the individual but eventually brought ruin to all. The culture of Silicon Valley turns that system on its head. The bank of expertise in Silicon Valley represents a triumph of the commons: resources are extracted and replenished in a self-regulating and efficient manner that promotes cooperation and growth. That triumph can be attributed to the Valley's distinctive geography, history, and culture.
Why The Triumph
Viewing the valley from the flight approach to San Francisco International, one is struck by how small the region is. As Venture Law Group's Craig Johnson notes, Silicon Valley "is like any gas that is compressed; it gets hotter." Its tribes overlap socially and professionally based on work discipline (software engineers, for example), organizational affiliation (Hewlett-Packard), or background (Stanford MBAs or South Asian immigrants). The most skillful players do not have to travel far to make deals, change jobs, or find professional partners. John Doerr of Kleiner Perkins is fond of saying that the Valley is a place where you can change your job without changing your parking spot.
Shared values also bind longtime Silicon Valley natives. The personal convictions of the Valley's remarkable innovators, who created not just a company but an industry, still echo through the community. Bill Hewlett and David Packard influenced the older generation directly; many of them were early employees. Through this old guard, collegiality and high standards for performance are being carried down to next-generation entrepreneurs.
Helping former employees is part of that legacy and culture. Senior mentor capitalists describe how Bill Hewlett encouraged them when they left HP and how HP engineers encouraged entrepreneurship generally. Former IntelliCorp CEO K. C. Branscomb tries to help people who have worked for her. "I will call venture capitalists for them. There are probably a half-dozen little companies founded by former employees that I have helped get funded." Mike Homer, former general manager of Netscape's Netcenter, expresses a similar sentiment: "I'm a pretty loyal guy to people I've worked for and who've worked for me. If somebody comes to me and wants this kind of help, I may not be the one to provide it in all cases, but I'm going to figure out how to get them the resources they need."
How The Commons Works
Mentor capitalists in the Valley function as an informal, close-knit guild. Today's employee may be tomorrow's boss; today's competitor, tomorrow's partner or acquisition. If you're an experienced, reputable member of the guild, you're entitled to draw from the common fund of expertise. Often, the exchanges aren't direct, one-to-one transactions. Bread cast upon the water returns in another form at another time from other people. "You can see it coming back to you," Johnson explains. "Like with Grassroots [his own recent start-up], I thought, who could help me on this project? The fact that I can call busy, successful people whom I don't know personally and have them return my calls—I think is a recognition that it's not just me, that it is just the etiquette of the game."
One doesn't become a guild member without credentials. The best-known mentor capitalists started businesses themselves or held senior positions in one of the Valley's garage-to-giant start-ups such as Netscape or Oracle. But having failed once or twice along the way does not disqualify them. In fact, the scars are proof of valor—provided one has at least as many booms as busts on the ledger sheet. Says Kleiner Perkins's Vinod Khosla of a prominent mentor, "People like him have earned the right to advise entrepreneurs. They are qualified to do it, they've done it right, they've done it wrong, and they know the difference." It is understood, therefore, that when you join the guild, you enter as a master craftsman, not as an apprentice.
Guild members depend on one another to prequalify potential entrepreneurs. Every hour that a guild member spends reviewing an investment risk represents a deposit in the bank. "I could take all the raw data with all the entrepreneurs who approach me and do my own filtering, and so could the venture capitalists. But it's an enormously time-intensive process. We've all learned that we can use each other as filters, and there's an unofficial ranking of filters in the Valley that people constantly have in their minds," Johnson says. Foundation Capital's Mike Schuh underscores the value of mentor capitalists as filters: "Of the hundreds of things that I look at every week, if it's got one of those [mentor's] names on it, I don't even bother reading further. I just make the appointment."
The mentor capitalists we interviewed share one habit: they refuse to make decisions for the entrepreneurs. Otherwise, their teaching methods vary tremendously.
Learning by Doing When Michael Chiarello, founder and CEO of NapaStyle, was developing the idea for his "media-driven Internet company," reflecting the casual but cultured lifestyle of California's Napa Valley, his coach Fern Mandelbaum, cofounder of toy maker Skyline, questioned whether other Americans shared his concept of Napa. "I thought, 'Come on, Fern, I will tell you what it means.' And she said, 'I believe you, Michael, I really do, but see if America believes you. Every position you take has to be defendable.'" So Chiarello, at Mandelbaum's suggestion, did market research. "Five of us sent out an e-mail questionnaire to ten of our friends, asking what Napa means to them. We asked them to send it to ten of their friends. We went out to a good section of America for a grassroots response to what Napa means."
Socratic Learning Scott Rozic, founder and CEO of XMarkstheSpot, recalls the tough questions that former CFO of Silicon Graphics Stan Meresman asked him: "'So, Scott, what's the one-liner, in two sentences or less — what does the company do?' Then you give the pitch and then he plays back, 'That's not compelling, let's make that compelling.' Or the playback would be, 'What is your competitive advantage, given the fact that....' And then he would identify two companies that sound like they would do the same thing, and he'd ask, 'What is the magic of XMarkstheSpot? Because there are so many companies out there, and everybody has funding. There is something magical about your company, but how do you distill that? '"
Stories with a Moral During an ActivePhoto board meeting, cofounder Sebastian Turullols was reporting on the young company's free cash and how to invest it. Former 3Com CEO Bill Krause responded with a cautionary tale: "Many years before, a CFO wanted to invest his company's cash in a high-yield, high-risk instrument. A senior board member told him, 'No one will remember the extra 1½% you made. But they will remember your losing $10 million.'"
Rules of Thumb Virtually every team we interviewed had the rule of "focus, focus, focus" instilled — or hammered — into them. However, mentors also knew when and when not to apply the rule. Fred Gibbons, founder and former CEO of Software Publishing, suggested that the ActivePhoto team members violate the rule when they needed to explore more than one market — but he cautioned them to experiment in no more than two.
Specific Directives Ken Coleman, an executive vice president at Silicon Graphics and mentor to many entrepreneurs, describes how he responded to a manager who wanted to fire a salesperson. The customer loved the guy, but he wasn't working out internally. "Here's the desired result — to remove this person but with a positive result. First, sleep on it. Be thoughtful about it. Get advice. Can you create a good exit strategy for this person? Create a win-win situation? Maybe the customer will hire him."
Learning by Observing Sanjeev Malaney, CEO of Media Tel (now MediaLinq) says that he "learned through osmosis" from mentor Rich Zalisk, who came in as the interim president. For example, Zalisk held a two-day planning session focused on the next year's objectives. Malaney learned from watching how Zalisk got "team members on the same page," working through priorities and budgets. "I learned a lot about how to facilitate and how to manage disputes."