IP: So Many Ideas, So Few Companies

[Dave Farber <farber () cis upenn edu>]

So Many Ideas, So Few Companies


By ESTHER DYSON


Outsiders revere Silicon Valley as some kind of secular miracle: money plus
ideas equals profits, which turn into ever more money plus ideas. Many
players in the Valley, who have never seen a real business cycle, think
they've finally found the formula for perpetual growth. Other countries and
regions are desperately trying to figure out how to create their own
Silicon (Geographical Feature here). Hungary is trying to sponsor a Silicon
Park near the Danube -- but will it find the requisite entrepreneurs to
fill it up? The best entrepreneurs would probably fail a Government
screening process. Even in the United States, with its profusion of money
and talent, there is now an imbalance: too many would-be investors and too
few real companies.


------------------------------------------------------------------------ In
Silicon Valley, everyone wants to be a C.E.O., but nobody wants to do the
grunt work of management, operations and marketing.
------------------------------------------------------------------------


This is the little problem that threatens to derail the Silicon Valley
miracle. The worst mistakes I've made as a venture capitalist were all the
same: investing in a good idea without the right person to implement it. My
excuse was that I was investing in Central Europe, where managerial -- as
opposed to technical --- talent is hard to find. But even in Silicon
Valley, with its wealth of business talent, the ratio between managers and
companies is out of whack. Past successes have produced an overreaction:
too many companies and too much money chasing too few people. The best idea
in the world won't go anywhere without someone to carry it through.


At first glance, it's an exciting time in Silicon Valley. Anyone with a
good idea can run with it. The culture fosters it. People and organizations
are ready to support it. Realtors take their rent in equity. Everyone is
talking about the shortage of programmers, but there are enough programmers
to be hired if you're willing to pay the price -- often in overly generous
stock options. Money is almost infinite as long as there are new investors
and stock prices go up. Ideas are plentiful, as creative people are
encouraged to invent products, services and business models for that
infinite platform called the Internet.


Everyone wants to be a chief executive officer, but no one wants to be
chief operating officer, chief financial officer or head of sales and
marketing, let alone a sales manager or development honcho. Once a head of
sales and marketing has gone through a successful start-up, he or she wants
to be a C.E.O. too. (A successful start-up, by the way, is any company that
manages to go public or sell itself before running into trouble -- and
often before ever shipping a product.)


That means not only that there are a lot of not-too-qualified C.E.O.'s but
also that those C.E.O.'s have a hard time finding good marketing,
operations, development and other people.


The best venture-capital organizations now incubate people, not ideas.
These people work as venture capitalists until they see an idea they like,
and then they go run it with financing from their erstwhile employer. But
there aren't enough of them to manage the huge volume of
ideas-in-search-of-talent. What many venture capitalists are creating now
are not companies but stand-alone divisions. Some of them are product
teams, others are little more than sales divisions, great at generating
excitement around a product that may or may not exist. But they are body
parts rather than living companies. Indeed, most of the money made comes
not from revenues but from initial public offerings and sales of
businesses. It seems that much of the Valley is now simply an R & D
department for a few larger companies that buy their new products in the
form of little companies.


Why is this happening? It's tempting to blame an overheated market for new
public stock offerings, and it's true that the market has accepted some
pretty flaky deals in recent years. But according to Broadview Associates,
eight times as many high-tech companies were sold last year as went public.
In 1996, the ratio was only 4 to 1.




In fact, everyone is acting rationally in the short run. Venture
capitalists invest in the hopes of taking a company public or selling it
outright (or doing both in succession). But this short-term thinking leaves
us with fewer companies capable of sustaining themselves for the long run.
The venture capitalists chase too many deals that never turn into real
companies. It's nice to make a quick hit on an I.P.O. or a merger, but the
process of building true markets -- or companies -- takes more than one
option-vesting period. In Silicon Valley, companies grow rapidly for a
brief period and then fall apart. That's not a tragedy, of course: everyone
gets rich and goes on to the next one. But as these companies come and go,
collecting money, they leave the real markets to Microsoft, Cisco, Dell,
Intel -- the companies that know how to absorb people and products, that
can build sustainable relationships with customers and distribution
channels, that can still use employees after they turn 40. They are living
organisms that leverage people to satisfy customers, not investors.


Silicon Valley is a wonderful example of the dynamism and fluidity of a
successful market -- where resources flow friction-free to the best people


and ideas. But our fascination with the market may be overblown. We need
new companies, not just new ideas. Like people, companies tend to get tired
and inflexible as they age. We need a steady supply of companies that not
only develop and exploit new markets but also bring a fresh spirit to the
business world (as Apple, Microsoft et al. have done in this era). Freedom
is great, but so is the commitment to seeing a product through to customer
hands, developing a cohesive team and molding a group of workers into a


company.


Esther Dyson is the head of Edventure Holdings, a venture-capital firm
based in New York. James Gleick, the regular Fast Forward columnist, is
recovering from an accident.


Copyright 1998 The New York Times Company










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