A Research Outpost in Silicon Valley

by Sean Silverthorne, HBS Working Knowledge

Under the leadership of Dean Kim Clark, Harvard Business School has developed four research centers throughout the globe. But the first Center was established close to home: Silicon Valley. The California Research Center recently celebrated its fifth birthday—a turbulent five years when Valley companies rose and fell with the Internet boom. Chris Darwall (HBS MBA '75), who was executive director during this period, offers her insights on that historic time, along with new director Alison Wagonfeld (HBS MBA '96).

Silverthorne: When you first established the Center in 1997, what was the reaction in the Valley?

Chris Darwall: Well, there was a big article on the front page of the business section of the San Jose Mercury News, and it said something like, "Harvard Steps on Stanford's Turf." And the reaction was, I would say, somewhat cold from…Berkeley and Stanford. The reaction was also not as warm from industry as you might expect. I would attribute much of that to the number of Stanford grads that we were running into in companies, because really HBS and Stanford grads dominate many of the industries out here, so we did run into a lot of them.

[Those attitudes] have changed over time, particularly at Stanford where a lot of professors will call the Center once a year and say, "What kind of cases can you recommend to me for my class this year?" Or, "Are you thinking of doing this kind of a case in the future, because if you are I'd love to know about it." There tends to be very enthusiastic reaction among the people we contact in companies about doing a case. People saw that Harvard Business School's primary interest was not building a campus here but doing research and case writing, which is complementary to these other schools because they do not do that much case writing themselves.

Alison Wagonfeld: Chris mentioned that relationships with Stanford have improved; that's certainly a benefit. There seems to be kind of an overall increase in usage of research centers in general by the faculty. At the California Research Center, I think professors have found [us] a very effective way of writing a good case that gets them to the real kind of DNA of an area or a culture.

Silverthorne: When you started, what kind of work did you think you were going to be doing and has that changed over time?

CD: When we first started there was a great demand for Internet companies, typically start-ups. The year before last…the students came in and were no longer interested in Internet cases. So, the feedback from students helps drive a lot of the interest in new cases and the types of cases that we go after. If you look at what I would call pure Internet companies, about a third of the cases that we have done over these first five years were Internet cases. However, if you look at the last twelve months, only 10 percent of the companies could be called Internet companies. In the past twelve months, professors have been interested in companies that are well established. So even the Internet companies we worked on in the past twelve months would be companies like say, Yahoo!, a very well established one.

Q: Of the companies you have studied, how many are still in business?

CD: I recently went through all the cases just to see how many companies are still around, these little tiny companies, and only eleven companies are not still around, which surprised me greatly. Only eleven out of 110 companies.

Q: What was the first case the Center wrote?

CD: Interactive Minds. Interactive Minds was a small company originally started as a consulting firm that turned into a small venture fund, and it was founded by two HBS grads. Interactive Minds is an interesting example because they were successful as a venture capital fund and really a niche venture fund; they worked with very early-stage companies and were very involved. [They] would often go into the company and work there a couple of months themselves, and over time they'd raise larger and larger funds. But they never became a mega fund, which was the downfall of many funds out here. Now they have a new name and are really focused on a certain segment, enterprise software. They're doing very interesting things in the community.

It's fun to look back on these companies. We can see how they've evolved over time. In two cases we looked at companies where the protagonist had an idea and wanted to start a company, but had nothing else—really no formal business plan, no money, and in one case no other people to work with him. One was a company that won second place in the first HBS Business Plan Contest, and that was Chemdex. It went on to become a public, valued-in-the-billions company and then had an incredible crash down to an extremely low valuation, and now they still exist under a new name (NexPrise). That was probably the most spectacular rise and fall of any company that we have seen.

Another company that we did a case on, Digital Think: Startup, is a company that really helped develop the online training business. The protagonist there is actually a high school grad. That company has been very successful. They eventually went public, and we looked at them when all there was was this one guy and his idea.

The Chemdex and Digital Think: Startup cases were designed to help students think through the day-by-day details of starting a company.

Q: Of the surviving companies you've worked with, are there common characteristics that you can point to that helped them endure this era of tremendous transformation?

CD: Well, it's interesting. You want to say it was management, but truly I think the biggest divider is the quality of the idea. When we wrote the first case on eBay, they had about $50 million in revenue and now they're over a billion in revenue. The person who started e-Bay, Pierre Omidyar, really didn't have a management background, but what he did have was a really, really good idea. He did have the insight to understand that professional management needed to come in, and they brought in Meg Whitman (HBS MBA '79). When she came there I think they had fewer than 200 employees, and now they have over a billion in revenues and they're extremely profitable.

Amazon: The idea of selling books on the Internet was a good sound concept. What's interesting there is that Amazon is still run by the original founder, Jeff Bezos. Unlike eBay, they did not turn to an outsider…

Preview Travel was another interesting one. Travel on the Internet is becoming a huge industry. Preview Travel was fascinating because it had morphed through several different business models. At one point they were doing travel videos over the Internet, but eventually focused on Internet-based travel and reservations, and really did quite well. We wrote a case about them when they were around the $12 million mark and were trying to decide what to do and whether to continue to focus in this one area. Eventually they were acquired by Travelocity and that created the largest online travel site in the world.

Q: Are there other common threads that you've seen in these surviving companies?

CD: In some cases there were way too many competitors so an industry segment would be overbuilt. In that case, only one or two in the segment would actually end up surviving. There were six or seven pet companies online—we didn't write about any of them. But in telecom we did end up writing about some of the companies where there was a lot of overbuilding. Sigma Networks had very good management, a good idea, and lots of money, but they entered a market segment that was just overpopulated and they entered too late and ended up failing.

Q: Can you discuss how venture capital firms have changed over the last five years?

CD: Well, there definitely was a change during the Internet boom years. A couple of things happened. One is that as venture returns went through the roof, venture funds began raising the mega-fund…$500 million to $1 billion dollar or more funds. The effect was these VCs were forced to make much bigger investments in companies. That changed a lot of what was going on out here by giving much more money to young companies than was typical.

Secondly, when we first opened up the Center, venture capitalists would typically seek out other venture capitalists to come in and partner with them. You'd see two to four venture funds investing in a company. But what happened during the boom was that, because these venture firms had to invest so much more per investment, and partly because, frankly, I think some of them got very greedy, you would see a lot of venture firms going in and doing the complete round one funding. Eventually both of these practices came home to haunt a lot of the VCs, because when the company got into trouble. The VCs were in there all by themselves. They didn't have someone to brainstorm with about the company. We saw some new firms during that time like Benchmark, which was made up of VCs from other venture firms. They wanted to set up a structure that they felt worked better in terms of governance, where everybody would share equally in every deal and you would work more as a team inside. I think their model became a model for some other new VC firms that formed during that time.

Q: On the subject of case writing, what were the issues that were looked at early on when you started, and what are more likely to be the issues that are explored in today's cases?

CD: Well, the issues early on would be a lot of entrepreneurship-oriented issues such as: What are the nuts and bolts of actually starting a company? What are the things you should think about first? What sorts of issues are you likely to encounter? Also, on the TOM [Technology and Operations Management] side, a lot of the earlier cases were looking at the application of technology and new technologies in companies in terms of helping the companies become more effective and efficient.

Now we're looking at issues like marketing innovative products, or how a company goes from being a successful startup to a formidable long-term player. We just finished two cases at Intuit, which was started by an HBS grad. Intuit had been very successful. They were a software company, but they were really based on entrepreneurial principles; everybody in the company was encouraged to start their own businesses. It was very decentralized. Now we've just finished a case on what their new CEO, who came from GE, is changing to allow Intuit to grow into a large long-term player as opposed to a niche player or a player that was going to be stopped by the decentralized practices that they had. He put in lots of centralized functions that really helped the company move toward being more like a GE.

I would say those two cases together are just terrific cases, because they are a wonderful blueprint for going in and doing something very systematically. A lot of times our students probably think, "Oh, that's boring," or "I might not like to work there." But it's really obvious from watching and looking in detail at what this guy has done that this is the kind of thing that one has to do to bring a company from being a well-run, entrepreneurial, smaller company into a larger, well-run, process-oriented company. These are good lessons for right now.

Q: Are there other issues that are different today than they were a few years ago?

CD: Well, we're also looking more at partnerships among big companies. One was AOL, Cisco, and Yahoo!; they got together to form a philanthropy portal. We're looking now at HP and Cisco; they have a strategic alliance and we're looking at how large companies implement these difficult strategic alliances; and again, this is a very nuts-and-bolts, how-do-you-organize, what-kind-of-processes-do-you-use kind of a case.

AW: We have done more social enterprise cases. There tends to be a lot of innovation around social enterprise in the Bay Area. It's not surprising that [technology] has worked its way into everything; even as far-fetched as having a church be innovative.

Q: Are there West Coast versus East Coast business styles?

CD: Well, I do think out here there's a lot more give and take between firms. People tend to not go and stay at one place for ten or twenty years, and people believe that's fine, that it's one way in which the whole Valley becomes more creative. There's a sense almost that this area is one large company, and that companies are really more like divisions than companies. So, people are much freer in sharing ideas and information, and I think a lot of that now is probably beginning to become true on the East Coast as well, but people here are very open about things.

Q: Describe the case writing process.

AW: It varies, actually, from one case to another and from one professor to another. We might come up with an idea because we've run across an alum who is doing something we know is kind of atypical and we think would make for an interesting case. We would go back to a particular professor and say, "Does this sound interesting to you?"

Or, we may have a professor calling us with very specific ideas: "I'm interested in a company that meets these criteria." Once the case idea is settled, then it's a multistage approach where we get permission from the company to go ahead and start writing that case. Then we decide who the six to ten people to be interviewed will be. Typically the professor comes out to California to participate in the interviews. From that point we typically work back and forth with the professor to write up a first draft. When the draft is nearly complete we show it once to the company to get their feedback and do one set of revisions, and then show a final draft to the company.

Q: What do you see coming in the next five years?

CD: What's exciting is that year to year the landscape changes so much. Silicon Valley is an incredibly inventive place, and historically there have been boom and bust cycles in terms of technological invention. Now we are going through a time of consolidation, even in industries such as venture capital. But I believe that another wave of invention will begin within the next three to four years. The next wave could be nanotechnology or technologies that build on high-speed networks as those become widely available in both homes and businesses.

There's always something new and exciting, and that's why the three of us love working here, because intellectually there couldn't be a more fascinating job.

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