Silicon Valley Panic – The Valley is Upside Down

I am seeing tons of panic here in Silicon Valley.  Just a few weeks after the Sequoia memo (great PR for Sequoia capital – wondering what Kleiner Perkins is thinking right now), the valley is upside down.

It’s crazy and it’s changing everything around the startup process.  The memo from Sequoia has thrown everything into gridlock and yet the VCs are sitting on billions of cash under management.

I think that this is the best time for a startup.  In fact the gloom and doom has reached an all time high.  Everyone is saying survive and fight another day or “How to Survive in Silicon Valley”.  This mindset is an indictment of the state of panic.

Instead the title should be “How to Thrive” – Playing it safe never was Silicon Valley’s greatest strength.   Has the Valley lost it’s way?

The Silicon Valley and Hollywood Dance – It’s a Hit Driven Market

There are striking similarities between Hollywood and Silicon Valley.  The inside joke that I’ve been sharing lately in comparing the two markets –  in Hollywood when actors are out of work (no script) they become bartenders or go to events and pose and in Silicon Valley when entrepreneurs are out of work (no startup) they are consultants or go to events and pose. Each actor or entrepreneur are claiming working on the next big thing.

Both markets thrive because of optimism.  That is why the best survive by seeing opportunities when other people talk about doom and gloom.  I see Hollywood and Siicon Valley striking a balance very soon.  They both need each other.  The both are realizing that they don’t have the skills that the other has.  This NY Times story strikes true.

If there is any proof point look no furthen than Steve Jobs success at Apple.  He and his team have single handedly changed the media game by using the ITunes platform (aka the ITunes store).

Of the NY Times story here is my favorite piece…

Hollywood and Silicon Valley are engaged in an awkward dance, Mr. Miller said.  “Having been inside studios, I know they don’t have the DNA to take early-stage risks,” he said. They get paid to make surefire hits like the Superman movie. “To start something from scratch, to take high levels of risk — generally speaking, that was not how the studios were built.” The two worlds speak different languages and “there is star envy on both sides,” he said.

Yet they have similarities, he said. Both are hit-driven businesses run by small, insular groups of people. More importantly, they need one another. Entertainment companies will founder if they don’t move from old media like television and radio to digital media. Meanwhile, tech companies will fail if they do not understand the content — movies, shows, music — that people will use their technologies to consume.

The economic downturn has arrived at a critical time for the entertainment industry’s transition to digital media. Many of these big media companies will be forced to cut back on acquisitions of digital media start-ups, Mr. Miller predicted.

Eventually, he said, there will be a shake-out, with two or three companies creating professional content for the Web, just as there have been dominant producers of network programming for television.

For now, “everyone agrees these worlds are crashing into one another,” he said.

New Startup Model – Young Grasshoppers Out There Watch How Andy Bechtolsheim Does It

UPDATE FROM SUN:  see comments below; Sun PR is saying that Andy will remain at SUN as an employee part-time.  The question is can Andy serve both masters?  Is Andy even needed there or is he a figurehead.  I see know problem with him being two places but the reality is he has to focus on one.  There might be more to this story.  I will talk to SUN and find out the story.

The NY Times is reporting that SUN Cofounder Andy Bechtolsheim is leaving SUN to go to his new startup Arista Networks (which has been building a product for 4 years). Who said this is a bad time to do a startup.  While the web 2.0 flops are bunkering down for the winter and trying to figure out what to do, Andy is developing a real business going after a real market.

I have my take on why Arista will be successful on my Broadband Developments blog – which covers this vertical.

This post is about how to do a startup.  Here I want to highlight a tidbit from the NYTimes story where Andy Bechtolsheim says…”

Lean staffing also helps Arista keep its costs down. The Menlo Park, Calif., company has fewer than 50 employees and started shipping systems a few months ago even though it had no formal chief executive.

“One mistake a lot of start-ups make with the encouragement of venture capitalists is to hire the whole management team upfront,” said Mr. Bechtolsheim. “You have a lot of people twiddling their thumbs and spending money.”

He is right on the money.  Ramping up the management team to early can be dangerous.  Founding CEO of a early or zero stage startup doesn’t have to be “Mr Big” with pedigree.  It has to be “Mr Entrepreneur” who can assemble the right ingredients for the startup – core team, product and product roadmap, key customer activity or early market development, and entry to that market.  Note;  Even tech titans moonlight on their day job before quitting.

To all the young startup “Grasshoopers” out there learn from Andy and his approach.  Build a product for a real market that will pay you money for that value – Now that’s a business model worth investing.

Zuckerberg Opportunity Part II – Silicon Valley Legacy at Risk?

The NY Times is doing a followup piece to my post called The Zuckerberg Opporunity. They are following up on my first post and story called The Zuckerberg Opportunity. The Zuckerberg Opportunity was a followup on the story on the big story that I have been tracking on Microsoft buying Facebook. The NY Times goes deeper into the deal side dynamics of the Zuckerberg Opportunity. (Note: I’m glad to see the NY TImes run with my original piece – it needs deeper analysis and more detailed reporting – thanks Steven)

NY Times DealBook has a great followup post to my post Zuckerberg Opportunity. The professor Steven Davidoff pens a detailed post around some of the tactical challenges around the Zuckerberg Opportunity.

What’s interesting here is how Silicon Valley and the VC community will respond to this. Silicon Valley has been an environment where the VCs have always maintained a balance between the ‘greed’ part of their job with the ‘unwritten’ rule of maintaining the legacy of Silicon Valley.

Lately, we have been seeing an environment lately where VCs really don’t care about screwing entrepreneurs over for a quick buck or shutting ventures down over political internal VC partnership fighting. If this trend of not building great sustainable companies continues then the legacy of Silicon Valley will be at risk.

I love Silicon Valley for what it has been famous for – innovation and the celebration of entrepreneurship. An enviroinment that rewards innovation, entrepreneurs, and entrepreneurship will create great companies and yield great profits for investors.

If Silicon Valley becomes known as a place not friendly to entrepreneurs and quick rich VC plans, then the legacy of Silicon Valley is at risk.

Silicon Valley Rumblings – Will HP Buy Seagate?

HP has been on the move lately. Expanding on the services business by buying EDS. What should HP do next? Buy Seagate?

Seagate (NYSE: STX) would give HP access to a major cloud position with storage in the cloud. Seagate known for their OEM drive business and enterprise storage recently launched a consumer business over 1 year ago. Why this might be interesting for HP and Seagate – HP has been a big customer for years of Seagate but HP could gain a foothold in the ‘cloud computing’ sector with Seagate. Seagate’s consumer line would certainly get a ‘shot in the arm’ from HP’s massive consumer presence.

Although this isn’t a full fledged rumor, it certainly is a conversation around Silicon Valley according to sources. I will dig into this more but I would buy the consumer brand and cloud services from Seagate and leave the OEM business alone. Seagate’s market cap is currently $10 billion as of today.

Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around

Why do startups fail? There are many reasons. Here is a post from a VC in Silicon Valley called VCDave – David Feinleib is a partner at MDV – Mohr Davidow Ventures – He invests in Internet-enabled companies.

This is a great post from VCDave, but I would add that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.

Once a venture enters the market the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.

If investors want a return remember that the founders know best. Don’t replace the founder to early.

http://www.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm

Update: Donna who tracks the NYC startup scene at StartupAlpha has a post on this. Here is 37Signals Jason Fried’s take at Signal vs Noise on this topic.

Two important points Donna and Jason make: 1) build a good sustainable venture and 2) if the market is slowly developing then there is no market.

Here is a good section from end of Jason’s post “If the entrepreneur finds themselves in a situation they can’t control it’s almost certainly because they put themselves in that position — either by borrowing too much, spending too much, rushing too fast, creating a false sense of urgency, hiring the wrong people, attacking a market that doesn’t exist, or not focusing on generating revenue early enough. Natural disasters are out of our control, bad business decisions are in your control.”

My advice to entrepreneurs: try to maintain control for as long as you can (control > 50%) at all costs. Only go over 50% dilution if you need to scale and never run out of money.

Update 2: An post from last year from Denny Miu who I have met and respect. He writes a great post that has lessons and observations.

Victory for Silicon Valley; The Silicon Valley Poison Pill Worked – As Predicted

Today’s Microsoft retreat is a victory for Silicon Valley and all the startups.  Now that the troops are pulling out of Silicon Valley everyone is jumping up and down eager to get down to business – except the bloggers who are all trying to figure out what happened (not including Kara Swisher she was on top of this story from day one).

This outcome was clear to me from day 1 – Yahoo would fight to the death rather than roll over and take it up the butt from Microsoft.  As this chapter of history comes to a close the story is bigger than what the stock number was or one particular issue.  It was bigger than all of that.  As I wrote in February it was the Silicon Valley Poison Pill in action.  The culture in Silicon Valley is deep in tradition and this trophy in Yahoo was not going to Redmond.  Hey I’m a big fan of Microsoft and Dan’l Lewin here in Silicon Valley (except that blogger idiot Mark Ashton), but the culture of Silicon Valley just won out.  This is going to make one great John Markoff story for the NY Times. – go ahead John run with it.

Another story line here is the big win for all those starving Web 2.0 companies looking for a partner – Yes Yahoo will remain free to be a real force in the Web 2.0 community again.  Now with open social (yes reported here first) and with upcoming announcements of Yahoo opening up.  Yahoo is born again.  As we the kids cheer in baseball Yahoo employees are cheering – “2 out rally….2 out rally….2 out rally…2 out rally”.  If this doesn’t wake up the dead at Yahoo nothing will.

This is a win for Web 2.0 and startups around the world but mostly a big win for Silicon Valley.   Yahoooo

Don’t forget how Google is loving this.