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what can dc netpreneurs learn from the ways of silicon valley?
a view from the valley

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matthew haley: competition is good

I have some notes written because one big difference between here and the Valley, is that we never start this early out there.

As Nancy mentioned, I'm in the process of relocating from the West Coast, so I have made 21 round trips since the middle of October. I have noticed a couple of differences between there and here. One is—and since I'm sitting amongst an august panel of lawyers and VCs I'll just say it out loud—one of the first comments I made to Fran about this subject was, "The lawyers here suck." I can only say that because of the bright people on this panel.

The reason I said it wasn't because the lawyers here aren't intelligent. It's that I'm used to calling a law firm and saying, "I think we need to incorporate; it's going to be standard stuff," and having them come back and say, "Do you want to have 20 million or 40 million shares? Of course there will be two classes of stock. You need an 83(b); I'll do that this afternoon. It would be nice if you swung by in the next couple of weeks so we can meet." The paper, of course, would follow. You'd pick the lawyer based on who is going to be able to understand your business. When you interviewed a law firm, the lawyer would show up with his or her associate, who is the person allowed to sleep alternating Saturdays, and the paralegal, who actually knows how to do things like write incorporation documents, but the process of creating the corporation is pretty easy. It's a "one from shelf A, three from shelf B, let's bind it all up" process. It's 250 pages, 5% of which changes between deals. Of that, 3% the principals talk about while the other 2% the lawyers hash out.

Out here, when I met with a couple of law firms, it was clear that the lawyers I talked to were very, very smart—easily as smart as the people in the Valley at Wilson Sonsini or Brobeck, the firms I have used before—but they said, and it was almost like apologizing, "I'm sorry, but we actually have to sign an engagement letter before I can incorporate your firm and it's going to take all day. I'll mail it to you." What a concept!

Ms. Spangler: Let me give you my phone number . . .

Mr. Haley: I know it's solvable, but this is one the things from your standpoint as entrepreneurs that you have to demand from your law firm, your PR firm and everyone. Competition is good. It is good for employees; it is good for lawyers; it is good for business plans. It's good for everybody. One of the things that's just slightly different between here and there, right now, is that there is a lot of competition for everything in the Valley. Yes, you can get funded quickly, but that presupposes that you actually did a little bit of research and you know that your company is a first round company. It means you know that you are strong on team, let's say, a little weak on technology and have no clue about market. Therefore, you know that you should talk to VCs who understand that kind of investment. You won't talk to the firms that are very strong on technology when you have a weak technology. One huge difference between here and there is that there are maybe 40 firms that are strong tech firms and maybe 20 firms that are strong market firms. You can talk to people and find out what kind of firm each one is, then you only talk to the right four or five VCs, and you don't have to shop the deal as often. It's not that the VCs are smarter there than here, it's just that there is competition, and that's always a good thing.


One other thing that people here aren't quite as familiar with is that Silicon Valley is actually a couple of different cultures. While we only have one government out there, it's the "People's Republic of California." You have a very strong libertarian organization—the kind of folks who say, "I understand there is a government. I write checks to them, but I never want to talk to them or work with an organization that lets you keep 7% of your income." While it's not as difficult as working with the four or five different government entities you have here, the commonality between San Francisco, the People's Republic of Oakland and San Jose is merely that they are all in the same time zone. You pick your location very differently based on what kind of firm you want to create. The Valley is very, very different based on the industry. There is no similarity between the semiconductor industry and the software industry. Intel and a .com in San Francisco don't even share a time zone. Intel has people who show up at 8:15 in the morning. When I was running a company, I tried to set my alarm for sometime near 8:15. Showing up by 10:00 was pretty cool. I was in every day at the crack of 10:00 AM. Most people at Intel left at 5:00 in the afternoon and didn't come back.

That's also a difference between here and there; something that is neither good nor bad. As Fran said, this is not a "we have to change Washington" thing; we just have to understand what's true here. People actually have a life here—shockingly enough. They assume that if you have a 9:00 meeting, it's probably in the morning. You wouldn't tell people, "Let's go to dinner, then we'll come back, we'll have a core team meeting at 9:00 or 10:00, then we'll pull everyone together at 11:00," and expect that everyone will show up. People here have a life. It's a good thing. It just means that we are going to have to do things differently than the Valley where companies have only one married guy. What are we going to do with him? I know, we'll hire his wife!

Here, in many ways, there is an oligopoly in many different kinds of industries. For example, we are trying to hire design firms, lawyers, real estate people, etc. There are four or five or eight really good ones here, but in the Valley you don't have an oligopoly. Even inside Wilson Sonsini, the lawyers don't all know each other. It's sometimes easier to get a reference for the right lawyer at Wilson from a different law firm than it is get one from another lawyer within Wilson itself. Even though there are not a ton of firms, the competition is still much greater because there are a few hundred partners and they all want your equity. You can't set lawyers at Wilson against each other, not publicly, but it certainly happens. That's something different.

There is some thought here that the Valley was "green space" and that this was "brown space" for technology. If you go back to 1980, Fairchild here in Maryland was bigger than Fairchild was in the Valley. The brown space we had was Lockheed, now Lockheed Martin. It was an aerospace organization, and it changed. I have no clue why. I have no recollection of the '70s for a different reason.

But it is different, and looking back is interesting and useful. One of the big differences there, today, is that we have serial entrepreneurs in the Valley, which we don't yet have here. Serial entrepreneurs provide networking. They can also say, "I have done this four times now. The third time I was actually able to pay off the mortgage for doing it the second time on credit cards. Here are some things you should avoid...." It's much more difficult to do that here. Part of it is, even though the area is very, very small, there are no dense areas like Palo Alto where there are 75 or 80 restaurants within a one square mile area in which you are going to constantly run into people you know who can introduce you to someone else who can help. We need a Buck's and that kind of thing. I don't know where people go for breakfast at noon here, but it just doesn't happen the same way. Again, that's neither good nor bad, but the density of serial entrepreneurs who can help you doesn't exist.

It's also density in service providers. Again, this is something that you have to demand. I see business plans in which people are going to hire a CFO in the near term. They want a great CFO who can take them public, which they plan to do in six months—as soon as they figure out what market they are going after and how to build the product. In the Valley, it's very, very easy to hire someone from Mark Greenough's Greenough Consulting Group which has 20 CFOs who will take you just prior to the point of an IPO. That's a difference between here and there, and I don't know how to overcome it. If I did, I would write the book, sell it and make a bunch of money. It's hard. If everybody in this room were to team up with two other people in this room and start a company, there still aren't enough qualified CFOs on the East Coast to take those companies public. We have to find ways to share that kind of skill set. It doesn't yet exist; at least I haven't found it here.


One other thing that I hear a lot about here is that we don't have Stanford. We have the University of Maryland, which is very similar, in many respects, to the University of California at Berkeley. What people don't understand here is that while Stanford is great, a lot of it was Dr. Frederick Terman. What we need to find here is the Dr. Terman for this decade here in the Washington area. There would have been no Fairchild out in the Valley or Hewlett-Packard without Dr. Terman—someone who understood technology and business. The other thing that people don't understand is that we have Santa Clara University in the Valley with a bunch of lawyers that offers things like "ethical team-building" and "relationships-building." We have San Jose State University, which provides a bunch of the engineers who actually populate the companies that the Stanford people found. The Stanford people make all the money; the San Jose State people populate the lower ranks. You need those engineers and software developers. It's a small population that graduates from Stanford. We can't claim that the thousands of developers in the Valley all graduated from Stanford—the number is greater than all of the alumni from Stanford for all time.

Another thing we have to look at, here, is how we avoid becoming Austin, Texas. Austin was the most recent area that was going to become "the new Silicon Valley." They actually made a better showing than Chicago, which was going to be the new Silicon Valley, before that, or the Research Triangle in North Carolina, which was also going to be the new Silicon Valley. People tried to emulate the Valley instead of figuring out those things we do in the Valley that are right, those things we do in the Valley that you can only do in the Valley and those things we do in the Valley that suck, but that we tolerate. One of the things that Austin did wrong was that the service companies there didn't figure out how to work at the speed software companies could, or should, tolerate. As a result, Austin has a huge technology base almost entirely focused on semiconductors. They were never able to move from semiconductor to anything else. If you look at the Valley, the companies that were founded in the '80s have only supplied people who are the doing the same things four generations later. My first patent was in integrated circuit design. Right now, I can recognize an integrated circuit if I trip over it or if it fries, but I have no capability whatsoever to do integrated circuit design anymore. However, I have been able to do several companies since then.

I'm representing Andersen Consulting, so I'm a service provider. You have to put these demands on us, and we have to act at a speed which, basically, gets us out of your way. Quite often, paper has to follow actions. We have to be able to shake hands and trust each other. Paper it up, but if you can't shake hands, agree and trust things very quickly, then it doesn't matter what the paper says. One of the things that is clear here, where there is so much government, is that paper follows paper instead of paper following action. We don't want to bring that into the high-tech space or we'll fail. We'll fail slowly, and we'll drown in paper. I'm sure something will actually get mailed, but that's a demand you have to put on us. We have to act at a speed that gets us out of your way and where we are not doing things beyond the call. You should expect good advice from a lawyer on how to build a partnership with one of your service providers. From Andersen you should expect good, competent advice, but not legal advice. When you call a lawyer, you ought to expect questions like: Am I representing you or the firm? Do we need to incorporate now? (Just because we can doesn't mean we should.) What's the IP strategy? Do the entrepreneurs want to own the intellectual property so that they can increase the value and screw the VCs over by saying, "Hey, we are not going to be able to have all the founders come unless you give equal shares to everyone." That kind of strategizing on how to keep the team together ought to come from your lawyer. If it doesn't come from your lawyer, there are a lot of other good lawyers who can paper a deal. If the lawyer is not someone that you can trust to help you get business advice, then you have the wrong lawyer. It doesn't mean they are a bad lawyer, it just means that they are wrong for you. If you know all of these things, then you don't need that kind of lawyer, but you may need a CFO who understands how to do revenue recognition and can explain to you the difference between sales and revenue.

Sales, by the way, have absolutely no relationship. I shouldn't say this in front of the Nasdaq person, but sales have no relation to revenues in the near term for a company when you are trying to accelerate your expenses and delay revenues. What the VC cares about is your sales growth, whether you are on the right path and whether your revenue recognition policy is correct. I don't care that my revenues were only $500,000 last quarter, I care that I had sales of $4.5 million and that we were only able to recognize X% of that legally—see, here is the plan. Everybody ought to be able to talk to you about that, not only your lawyer, not only your CFO, not only your Sales VP, but everyone in the firm needs to be able to understand those kinds of things. We don't have the serial entrepreneurs here, so we are going to have to demand more. You, as entrepreneurs, are going to have to demand more of us as service providers to help you do that. If we are not providing that kind of value, you should fire us. It's really clear, in my opinion—although this is one thing where I can't speak for Andersen when I say it. If we are not doing that, then we are not providing the value for the hourly rate that we charge, and neither is anyone else. If we are providing that value, then—and this is a Valley thing—I don't care what it costs because it's worth it. The difference between a $300 an hour lawyer and a $450 an hour lawyer is nothing if they saved your butt on something. That's the way you need to think about us. If we are only a vendor to you, not part of your team, then we haven't done our job.


colloquy, questions and answers

Ms. Spangler: Matt, you were very provocative with your remarks. Dave and I were sitting here saying that we have serial entrepreneurs, here. We don't have many, but we have a couple.

Mr. Sylvester: Actually, I think we have more than a couple; we have quite a few. We have the Steve Walkers and the Mario Morinos and a lot of those folks. We don't have the same percentage that the Valley has, but we do have quite a few. Once you are here longer, you will see that.

Mr. Haley: What I mean is that we don't have the 30 or 40 people you can interview to be a firstline engineer who has done it twice and intuitively understands the risks he or she is taking. You can correct me if I'm wrong, but what I see that we're missing is the middle level people who have done it at the junior level, and the first level management people who are now at the director level.

Mr. Sylvester: Again, I don't think we have the same percentage, but you do see a lot of those people. It has been in the last three or four years that that level of expertise has bumped up. To defend Nancy and me in terms of service providers . . .

Mr. Haley: I wouldn't say that if you weren't here . . .

Ms. Lew (joking): Do you two have email?

Mr. Sylvester: Not only do we have email, but I actually can't remember the last time I sent or received a letter, but that's because I don't write. There is a perception that we should have the same percentage of all those things that they do in the Valley, and that we don't have them, but we do have the lawyers who have been doing this for a while and who do understand what you have said. We are clearly getting more competition. We are going to be better lawyers, and we are going to make our competitors better lawyers because of that competition. All you need is here. We just need to be sure that we present it in a way that people have access to it.

Ms. Spangler: To your point about Buck's, if you want to know where the money hangs out, go to the Starbucks in Potomac on Saturday mornings from about 8:00 to 10:30. You will be surprised to see how many venture capitalists and entrepreneurs hang out there.


Mr. Haley: In the morning?

Ms. Spangler: Right, right. I think Starbucks closes at 6:00 PM in Potomac.

Mr. Sylvester: Also, I want to point out that I had a meeting last night that started at 9:00. That's why I was late this morning.

Ms. Spangler: Ginger talked about VCs pulling back and wanting to do more due diligence. Are we at risk, as an entrepreneurial community, of lengthening what I'll call the "dance to the money?" When I look at some of these companies that took four to six months to get financed, I think, "If only they would have had the money early on. They could have been six months further down the road and could have tapped into a particular market." Ginger, how do you balance that?

Ms. Lew: It can be quicker if it's a deal that we are extremely interested in, where we have good rapport with the entrepreneur and if we have had a great exchange with them—meaning that we are asking questions, they are getting back to us immediately and we are doing this in real time. That's as opposed to sometimes when you talk to an entrepreneur and they are traveling, so it takes them a couple of days or maybe a week to get back to you. We recently did some due diligence, came to a term sheet and were ready to invest in a company in two weeks, but that's a bit of an accelerated time frame for us. On average, we try to move forward within, let's say, four weeks. I don't think that's an unduly long period of time. We have to understand what's been happening in the marketplace.

I think that some of the limited partners, in other words, the financial institutions, are taking a closer look at what the VCs are doing and their level of due diligence. For a while there was a saying in the Valley that VCs were investing in "burgers." They were investing in these companies and "flipping" them. In a very short period of time, they were expecting to take them to the marketplace and do an IPO in 12 months, in some cases. I know one company was taken from their first round of financing to an IPO in six months, but the company was not sustainable. Some of the VCs are starting to see that the initial bounce they got on the first day of the IPO was not sustained until six months out when the lockout period expired. All of a sudden, stock that was $30 is now trading at $2 or something like that, so they are learning some lessons in this process, too.

Ms. Spangler: In the last year and a half or so, we've had angels groups start up in this region like The Dinner Club, the eMedia Club . . .

Ms. Lew: WOMENAngels, which Nancy and I are members of . . .

Ms. Spangler: Yes. Matt, does the Valley have that, how long did it take to develop and how important is it? Are we on the right track with those kind of things out here?

Mr. Haley: I think that we are on the right track because it helps people who have made money once feel comfortable in doing angel investments. "Angels with new wings" is how we used to think of them. We have a lot of historical angel organizations, such as the Band of Angels. Anything that supports people actually doing due diligence is good.


Before I start with Andersen on Monday, I can still say what I used to tell people—from my perspective of having done a couple of companies, the very worst thing that can ever happen is to get money before you do the due diligence and know whether or not this is the company you want to run for the next four years of your life. Just because it was a cool idea and you did it on a napkin, just because you can get money doesn't mean you should. One of the things that you get from experienced angels or experienced VCs is some simple questions about why you are doing this. Do you really want to be doing it? Do you understand that two years from now you are going to get up in the morning and do absolutely nothing related to anything intelligent? You are actually going to be filling out forms to make sure that all your job descriptions are ADA compliant while you are asking, "What does ADA stand for?"

We probably don't have as many of those angel organizations here as there are in the Valley, but they do seem to get companies up faster when you have a bunch of people with good knowledge.

Ms. Spangler: I have a question from the audience on valuations. We have seen the .com public company valuations cut by 50% and more. Ginger and Matt, are you seeing valuations that might have been $10 million before now at only about $5 million?

Ms. Lew: We were looking at a deal on the West Coast where the entrepreneur started off demanding a $30 pre-money valuation. After a month and a half of getting no takers, all of a sudden it got sliced down to $15 million. I think that we are now going to do the deal at $12 million pre-money, so, yes, I have seen some real-world context in the last 90 days.

Mr. Sylvester: To follow up on that though, Ginger, Cowpers just announced that they are going to take money out of the market and put it into less risky venture capital investments, which is a surprising concept. How is that going to affect valuations, deal times and everything else?

Ms. Lew: Cowpers, which has been a very active player around the United States, has a provision in their pension fund that allows for up to 5% of its funds to be invested in VC funds. I find it interesting that they're characterizing the VC market as being less risky, but I think that in the last year and a half to two years, they have come up with a model for how they fund funds. It seems to be working for them, so I think they are much more comfortable.

Ms. Spangler: By the way, I want to let everybody know that there are microphones around the room, so if you want to stand up and ask a question, go ahead. Sir?

Mr. Mandel: I'm Tom Mandel. I'm a serial entrepreneur, and I have had pretty significant experience in Northern California. I founded Screen Porch, now part of Caucus Systems, and I have a new company called Mighty Acorn. I have a comment and a question. My comment is that Silicon Valley has entered the realm of the law of increasing returns. That is to say, the amount of people and amount of money is such that it's possible to continually increase the richness and value of what you are doing. It would seem to be that our imperative in this region is to get to that place. Having a lot of experience in both areas, I think we are moving faster here than the Valley did, at least partly because we have the advantage of a model that was created out there to understand how to intentionally build a community around these ideas, not that the Valley was an intentional community.


Forgetting about the differences between the two places, what are the three things that this community most needs to do to enter the realm of increasing returns?

Mr. Sylvester: I'll answer that with just one. I think we must continue to view ourselves as a community and make sure that we understand that it is as a community that we will either make or break this.

Ms. Lew: My comment would be to continue to have events like this, to support organizations like the Morino Institute and because these are the organizations and events that catalyze the entrepreneurial community. They also provide a forum for us to come together and meet. In Silicon Valley, you could go to an event morning, noon and night, in fact, multiple events at night. While there are a lot of events here, I'd love to see more of them.

Mr. Haley: I'd like to say something provocative since that's my role here. I would get over thinking that employee migration is bad. We used to have a "three drawer" hiring model. We'd interview a person in the morning, pass them on to a couple other people, then interview them again at the end of the day. Based on the feedback, they either get the salary offer from the left drawer, the middle drawer or the right drawer and you are going to hire them that day. We'd hire as many people as we could, especially when we found somebody who was really good. You might not have a growth path for that person, but you'd know a friend at some other firm who needs this person right now or later on, and right now I'm going to get a Sales VP from him or from someone else that he knows.

Migration isn't bad. Here, for some reason, we think that having someone work for us for five years is a good thing. It could be a good thing; it could also be a totally terrible thing for their career. I would do two things. I would get over the idea that employee migration is bad, and I would hire a failure. I have helped a couple of companies out here do a lot of interviewing, and there is still a little bit of fear about that. Just because they failed somewhere else, if someone really blew it bad, they think of it as a negative. They will never make that mistake for me. They may make a new mistake for me, but they are not going to make that same one.


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