matthew haley: competition
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
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
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
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
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
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
Ms. Lew: My comment would be to continue to have events like
this, to support organizations like the Morino Institute and
Netpreneur.org 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.