Will Elon Musk grow up in time?

On Thursday the SEC sued Elon Musk for tweeting on August 7 that he had financing to take Tesla private at $420/share. It says the number not based on specific conversations with his financiers, but a guess — based on a 20% premium — that was rounded up to a number that is meaningful in stoner culture in hopes of impressing his new 30-year-old girlfriend.

That the claim had serious repercussions is hard to dispute: the shares had dropped to $320 when he abandoned the idea of going private, and closed at $265 Friday, 24 hours after the SEC suit. Musk walked away from a settlement, and now (seems to) assume that his $420 claim is consistent with is vague oral agreement with Saudi financiers — or that juries don’t like to convict celebrities. (Alas, Johnny Cochran is not available for this trial).

By sheer force of will, Musk created three companies in new (or newly disrupted) industries. Unfortunately, none of them have been profitable — Tesla (now parent of SolarCity) continues to lose money, and (the still private) SpaceX still appears to be losing money.

Many have noted that Musk is his own worst enemy (perhaps like our Tweeter-in-Chief). With executives jumping ship at Tesla (WSJ says 50+ at the VP level in past 2 years), he’s driving away the talent he needs to pull the company out of its CFIT. At age 47, it’s long past time for him to grow up.

I’ve never owned or shorted Tesla shares; at the same time, I’ve always been skeptical of Tesla because of its egomaniacal founder who reminded me more of Howard Hughes than Steve Jobs. In response to the SEC, Musk said

Integrity is the most important value in my life and the facts will show I never compromised this in any way.

This is from the man who in 2008 divorced the mother of his five children to marry a 20-something British actress. (She divorced him four years later). Again, he is more like Howard Hughes (with his fondness for starlets) than Steve Jobs, who at his death was attend by his wife of 20 years, the mother of three of his four children.

Some say you can compartmentalize integrity. Some might argue that Donald Trump never reneged on a real estate deal — or Bill Clinton on a political deal. However, no one could claim with a straight face that integrity was either man’s most important value.

The WSJ’s “Heard on the Street” on Friday summarized the veracity-challenged CEO:

There is a fine line between hyperbole and falsehood and Mr. Musk’s ambitious guidance for vehicle production skirted very close to it. To cite just one example, Mr. Musk told investors in May 2016 that he expected Tesla to produce between 100,000 and 200,000 Model 3 sedans in the second half of 2017; Tesla wound up making about 4,000 of the cars that year.

WSJ columnist Holman Jenkins noted

Even with the SEC suing to remove its visionary chief, Tesla is still worth $45 billion in the market. That’s about $204,000 per car it expects to sell in 2018, compared to $4,900 per car for GM and $20,000 per car for BMW, both of which produce cars at a profit.

In other words, Tesla is still valued as if tomorrow’s expected profits won’t be coming from the car business but from some Musk magic yet to be revealed. Blame Mr. Musk’s Wall Street cheerleaders for fostering this illusion, not the SEC if its action this week finally deflates the Musk bubble. 

There is another possible explanation: Musk is not immature or crazy, but desperate. Sometimes, leaders facing long odds realize that everything has to work just right or they will fail. Last night (Friday), my men’s group last night discussed a book on Ernest Shackleton’s third expedition to Antarctica in 1914-1916, when 28 men survived over a year trapped on the polar ice without communication with the outside world.

These sorts of against-the-odds successes usually require both flawless execution and a few lucky breaks. Although they never employed Tom Brady, my former favorite football team had a succession of quarterbacks (Hadl, Fouts, Brees, Rivers) who mount the frantic come-from-behind passing offense; occasionally it even worked.

Musk got a bad break in 2016: the Democrats losing the White House was bad for Tesla and Solar City, even if it might be good for SpaceX. His projected ship dates seem to assume everything will go well, and such assumptions are frequently proven wrong.

 If Musk gets banished, the prospects are grim for his empire, his wealth and his investors. SpaceX has a capable successor in place — president Gwynne Shotwell — but Tesla does not. Unless Musk starts acting like a grown up — and demonstrate a credible succession plan — it will be hard for Tesla to raise money, attract capable talent and management, and keep the stock price up.

So which is the greater longshot: Musk grows up, or he saves Tesla without a personality transplant? Compared to either one, I think LA’s inferior football team has better odds of winning the Super Bowl this season.

Hire great workers, even if you can't keep them

Silicon Valley — like the Big Four accounting firms and big law firms — has a well-deserved reputation for hiring bright young people and working them hard until they move on. While the impermanence of SV employment (6-12 months is not uncommon) may be unique, the idea of hiring good people is not.

In his new book Superbosses: How Exceptional Leaders Master the Flow of Talent, Dartmouth leadership professor Sydney Finkelstein argues that a key trait of the best bosses is that “you’re better off having the best people for a short time than average people forever.”

That philosophy fits well with my own experience as a manager during my 15 years as an “executive” (of 5-15 employees) at my startup company. At my entrepreneurship blog, I summarize the comparison of his comments (from his recent WSJ article) with my own experience.

I have great respect for Finkelstein. In an earlier book, he provided the clearest explanation of why once-great Motorola destroyed itself because (as I saw in my cell phone research) of its inability to come to grips with the disruptive shift from analog to digital mobile phones and base stations.

However, there is one line in the article that would give a chuckle to any veteran Silicon Valley watcher — where he lists Larry Ellison as one of “the world’s greatest bosses”). Yes Ellison is a self-made billionaire worth $40+ billion and one of the world’s 10 richest people. And surprisingly, Oracle has had a great run of growth for the last decade, even if the stock price is below where it was in the summer of 2000.

This is the same Ellison whose ego is (or was) so large that his biographer titled the book The Difference Between God and Larry Ellison: God Doesn’t Think He's Larry Ellison. So while Ellison was successful and had some smart people working for him, I don’t know that I would hold him up as a role model (even in Silicon Valley) of how to best lead people.

Silicon Valley's ambivalence towards growth

Last month, the latest mayor of Palo Alto explained his slow growth philosophy against both economic and housing growth. An interview with Curbed San Francisco began

Curbed SF: Everybody agrees that too many people can’t afford Palo Alto. So why is it like this?

Mayor Patrick Burt: There are a number of factors. First, we’re in a region that’s had extremely high job growth at a rate that is just not sustainable if we’re going to keep [Palo Alto] similar to what it’s been historically. Of course we know that the community is going to evolve. But we don’t want it to be a radical departure. We don’t want to turn into Manhattan.

Curbed: But there’s a pretty big margin between Palo Alto and Manhattan. What are you comfortable changing?

Burt: We're looking to increase the rate of housing growth, but decrease the rate of job growth.

Curbed: You want fewer jobs?

Burt: I know, it’s a strange idea to contend with. But this doesn’t mean we want no job growth. And it doesn’t mean we want reckless job growth. We want metered job growth and metered housing growth, in places where it will have the least impact on things like our transit infrastructure. …

The interview seemed in response to the resignation of a city planning commissioner who resigned two weeks earlier because her family could no longer afford to live in Palo Alto. It’s hard to disagree with part of Park’s argument that economic growth requires housing growth — but Burt (a medical device CEO) seems ambivalent about the latter as well.

In today's Wall Street Journal, former hedge fund manager Andy Kessler notes that the cheapest house in Palo Alto has 959 square feet, backs to the train tracks, and costs $1.35 million. (That's roughly double what a comparable house cost when we looked at moving to Palo Alto in 2002).

Kessler continued:

I wanted to ask Mayor Burt: Is stifling job creation really going to help? Or would that only boost surrounding towns? Palo Alto has already capped the annual growth of office space. It took years to approve a new $5 billion Stanford Hospital extension, which the area desperately needed. Even worse, there is a funny quirk in the zoning laws that limits what’s allowed in so-called Pedestrian and Transit Oriented Development areas (downtown). This includes restrictions on research and development, a catchall for limited manufacturing, “storage or use of hazardous materials,” and “computer software and hardware firms.”

I can tell you outright that the only hazardous materials in an office of software coders are their high-test caffeine concoctions. But the software firms are many. Amazon has its search team in Palo Alto. The big-data firm Palantir has been gobbling up buildings for its engineers. Facebook had several before moving to neighboring Menlo Park. SurveyMonkey has a huge site near the train station.

Even Palo Alto’s residential areas are filled with startups, real-life versions of Erlich Bachman’s house from HBO’s “Silicon Valley.” They’re easy to spot, having more cars parked during the day than at night. These companies offer high-paying and productive jobs that are great for society.

In the 1970s and 1980s, San Francisco was decrying “Manhattanization” but today that is a fait accompli. Meanwhile, most of the Bay Area (particularly the City and the Peninsula) is emulating the trends of excessive living costs that drove large companies and jobs out of New York City during that same period.

The explosion of housing prices in the Bay Area over the past five years is pricing ordinary workers out of the market. Yes, it is possible to commute from New Jersey (which here is called "Contra Costa County"), but such commutes strain highway and mass transit infrastructure (and push suburban and exurban housing prices up too).

Kessler notes that the solution to high housing costs is (surprise!) building more housing. I understand the importance of making available single family homes, and I think it is a strength of both California and the U.S. more broadly. Still, anyone driving along I-280 knows there are large swaths of undeveloped land in the Bay Area — that in LA would be houses but in the Bay Area are called “open space.” According to Wikipedia, the housing density of Palo Alto (2,500 residents/acre) is half that of nearby Cupertino, and less than one-fourth that of Santa Monica — another upscale, highly desirable community. (Burt’s hyperbole is demonstrated by noting that the actual housing density of Manhattan is nearly 30 times that of Palo Alto).

So will Silicon Valley voters (let alone politicians) embrace the full implications of economic growth by developing undeveloped land or increasing housing density? Or will it continue down this path of being available to well-paid tech elites, while ordinary (non VC-funded) entrepreneurs and businesses have to move elsewhere?

More about the Silicon Valley legend

My friend Shane Greenstein this week wrote a book review of Moore’s Law, a biography of the famous Silicon Valley chemist, entrepreneur, billionaire, philanthropist and visionary. As Shane opened his Wall Street Journal commentary:

Fifty years ago, Gordon Moore formulated his famous “law,” typically summarized as “the number of transistors that can be placed on an integrated circuit will double every two years.” The accumulation of exponential improvements that he foresaw has indeed ushered in perpetual reductions in the cost of computing and the size of computers. And it’s at the core of the information technology revolution.

Even before his famous 1965 paper, Moore was a Silicon Valley pioneer, there when they put the silicon in Silicon Valley. After attending SJSU, Cal and Caltech, in 1956 Moore went to work for (later Nobelist) Bill Shockley, working on the technical challenges of adapting silicon (rather than germanium) to construct reliable semiconductor devices.

The next year, Moore and others of the Traitorous Eight set the pattern for the Valley when they Shockley Semiconductor to found Fairchild Semiconductor — the Valley’s first (unsanctioned) spinoff. In 1968, two of the eight — Moore and Robert Noyce — took Andy Grove to start Intel. (Four years later, fellow Traitor Gene Kleiner joined Tom Perkins to found the Valley’s legendary VC firm)..

Never fired and married to the same woman for 60+ years, Moore was neither a showman nor celebrity like the late Steve Jobs. Arguably, he and his compatriots did more than anyone else to set the pace of Silicon Valley (at least during the five decades when there was still silicon in Silicon Valley).

The authors of this latest biography — “a chemist, a historian and a journalist” — offer the definitive story of the 86-year-old chemist. As Shane concludes:

The authors have material on just about everything in Mr. Moore’s life—his relationships with his wife and children, the Porsche he drove, even his childhood adventures with nitroglycerin. The detail, on occasion, becomes overwhelming.

Yet the book brings an insider’s perspective into the discussion of Moore’s law. What became the law first emerged in 1965, in an article modestly titled “Cramming More Components Onto Integrated Circuits,” published in the journal Electronics. By the authors’ account, nobody paid much attention to it at the time. Why do we know it today? Mr. Moore revisited the idea in 1975, updated it and devoted public speeches to it. Others began to notice its deep foundations at the boundaries of science and production; Carver Mead, a longtime professor at Caltech, was the one who actually coined the term “Moore’s Law.”

Gordon Moore’s forecast was spectacularly right. Yet, as this compelling biography proves, even if he had never hazarded it, he would remain a legend in Silicon Valley.

Alas, it’s hard to deny the passing of this era. Moore is the only one of the Intel founders still alive, and one of only two (with Jay Last) of the Fairchild founders. Despite its continuing microprocessor monopoly, nearly 15 years later Intel stock is still only half its peak level of August 2000. Internet software — not electronics — is where Kleiner Perkins is making its money nowadays.

Fractalization (and trivialization) of technological innovation

My friend Frank Piller this morning shared a witty story from last week’s New Yorker. The title and subtitle say it all:

“Let’s, Like, Demolish Laundry”
Silicon Valley is in a bubbly race to wash your clothes better, faster, and cooler. This is not a metaphor. Unless, you know, it is.

The story about IT-enabled laundry delivery services focuses on Washio, a LA-based seed-funded startup. The three founders cruise along confident in the brilliance of their idea until they run across three Bay Area rivals (Laundry Locker, Prim, Rinse) — one incubated by Y Combinator — and eventually five more from NYC and two from Chicago.

Author Jessica Pressler makes only a feeble effort to restrain her sarcasm. In commenting why so many other tech entrepreneurs are addressing the same need:

In reality, when people in a privileged society look deep within themselves to find what is missing, a streamlined clothes-cleaning experience comes up a lot. More often than not, the people who come up with ways of lessening this burden on mankind are dudes, or duos of dudes, who have only recently experienced the crushing realization that their laundry is now their own responsibility, forever. Paradoxically, many of these dudes start companies that make laundry the central focus of their lives.

But even in this segment, “new innovations are dying from the day they are born… There’s a term for this. It’s called the hedonic treadmill.”

Some of it has an anthropologist-visits-the-strange-tribe-of-Silicon-Valley feel. Even though their main office is in Santa Monica, Washio has the same (post-Amazon) disrupting of the physical world that brought us Pets.com and Uber. Their goal is to be “the Uber of laundry," and their share a common seed stage investor.

But early on, Pressler raises a more fundamental question:

We are living in a time of Great Change, and also a time of Not-So-Great Change. The tidal wave of innovation that has swept out from Silicon Valley, transforming the way we communicate, read, shop, and travel, has carried along with it an epic shit-ton of digital flotsam. Looking around at the newly minted billionaires behind the enjoyable but wholly unnecessary Facebook and WhatsApp, Uber and Nest, the brightest minds of a generation, the high test-scorers and mathematically inclined, have taken the knowledge acquired at our most august institutions and applied themselves to solving increasingly minor First World problems.

Certainly Amazon and Google and Facebook (mostly) allow us to do things we did before, just more quickly and cheaply and conveniently. Yesterday, my sister-in-law could have mailed pictures of her daughter’s graduation to her friends and relatives, but instead she posted them on Facebook and they were instantly available.

Like Pressler, many of these activities seem trivial when I compare this to other “big” innovations, like trying to get mankind back into space or provide enough food and energy to bring 5 billion of the world’s 7 billion people up to developed world living standards. After changing jobs three years ago, life at my new employer reminds me that the life sciences have many important unsolved problems, whether it be preventing deaths from malaria and tuberculosis in sub-Saharan Africa or finding a cure for cancer.

But on another level, Pressler’s article would come as no surprise to my innovation strategy students of the past eight years (whether at KGI, UCI or SJSU). The pattern is straight out of Dealing with Darwin, the grand unified theory of innovation by Geoff Moore (best known for Crossing the Chasm).

One reason I use the book is that it offers a cogent explanation of the role of innovation in mature industries. He subdivides such innovation into two categories, operational excellence (cheaper) and customer intimacy (better). For the latter, he uses the metaphor of “fractalization”, as illustrated by this diagram from Chapter 6:

As Moore explains (p. 111-112)

Figures 1 through 3 represent the early, middle, and late stages of a growth market. ... As the figures indicate, the driving dynamic at this point is a single-minded attempt to acquire new customers and claim market share.

By the time we hit figure 3, however, the market for the basic offering has become saturated. One can no longer grow simply by adding new customers to the category because the bulk of them have already been added. After virtually every home has a phone, every garage a car, every child a personal sound system, what do you do next?
…
Thus, from the mass-market Model T car, for example, the automotive industry first generated line extensions: a sedan, a station wagon, a truck, a couple, a limousine.
…
Increasingly fine-grained fractalization can and will continue as long as there are discretionary dollars to spend in the system and the category as a whole has not become obsolete.

We do need to recognize the contributions of the laundry app innovators (even if they go the way of the sock puppet). By moving the realm of innovation from the physical world to the digital world, they are enabling new form of experimentation and innovation — as happened in retail, communications, advertising, journalism and other established industries.

Pressler makes clear that the laundry apps still depend heavily on their contract laundry suppliers who do all the work. But if such apps catch on, it would seem obvious that the laundry market will be rapidly consolidated, with the tiny corner dry cleaners replaced by a handful of regional factories. One would expect (as with Web 1.0 and 2.0) the adoption will be most rapid in Silicon Valley, with the shops in Palo Alto or SoMa served by ecofriendly delivery trucks driving from large plants in Morgan Hill or Livermore.

Best-run companies are not the best to work for

The Merc did a Silicon Valley take on the November 2011 “Best Places to Work” list prepared by Glassdoor.

Here are the top 5 overall:

1. Bain (of Mitt Romney fame)
2. McKinsey (the high end strategy consultants)
3. Facebook with a 4.3 out of 5.0
4. MITRE (alongside RAND, the elite DoD consultant)
5. Google - 4.0/5.0

This is yet more evidence proving my career maxim to my undergraduate students: all things being equal, you’ll be much happier at a high gross margin company than a low gross margin company.

Other Bay Area companies listed

• Apple (10) - 3.9/5.0
• Salesforce.com (13) - 3.9
• Chevron (16)
• NetApp (30) - 3.7
• Intel (32) - 3.6
• Groupon (40) - 3.6
• Intuit (42) - 3.6
• Nvidia (49) - 3.5

But what was really interesting was the losers in the beauty contest:

• Yahoo,eBay,Oracle: 3.2
• HP: 2.5 (Note: HP Pavillion, the ice hockey arena, rates 3.4)

(The Merc said Netflix ranked below Yahoo, but the numbers are not on the Glassdoor site.)

A few observations

• Having a good boss helps, but isn’t enough. NetApp’s CEO got 100% rating from employees but his company is only 30th. Apple CEO Tim Cook is liked by 96% of Apple employees vs. 89% for Mark Zuckerberg, but Facebook is still preferred overall
• Being a winner certainly helps, but again isn’t everything. Apple stock options from 2005 or 2008 are worth far more than those from Google, but Google wins out overall.
• Being a loser certainly hurts. Then high-flying Netflix was #3 on the 2009 list, but this year employees seem demoralized by wave upon wave of bad news.
• Some results are puzzling. Yahoo is perpetually up for sale, but does well compared to two companies that are in no danger of going away. It’s equal to Oracle, which has $26 billion in working capital — more than the GDP of half the world’s countries. Yahoo ranks well ahead of HP, the once great company whose total assets are 50% more than Oracle’s

Young high growth companies are exciting, but what happens when the growth (and stock returns) disappears? Groupon employee satisfaction will collapse when (as with Netflix) the high-flying stock comes crashing down to earth. Will a mature Facebook become another Google, more like Intuit (down 31 slots in 3 years), or end up like Adobe (which is no longer on the top 50 list).

It also confirms what I've observed since Steve Jobs took over at Apple in 1997. Apple is the Valley’s most valuable and (among Fortune 500) highest growth company, but it’s not a worker’s paradise. People work hard, and unlike at Google, it’s all about business. As long as their run continues, it will be a good place to work, but it remains very demanding.

Meanwhile, Google seems to me to be like IBM 40 years ago — a dream job living off monopoly profits. What will the working conditions be like when the rents from search dissipate the same way that they did from mainframe computers? Like IBM, I think the company will make a fair and ethical transition in how it handles its employees, but like IBM (and HP) it will be unable to treat them as generously as it did during its salad days.

Are firms serious about open innovation?

Cross posted from the Open Innovation Blog.

Given the popularity of open innovation, it was inevitable that companies — and researchers — would seek to wrap themselves in the term to leverage its cachet to legitimate their otherwise unremarkable efforts.

One way that I’ve seen this is through a Google news watch on “open innovation” that lands in my inbox every night around midnight ET (9pm Pacific.) Every day there are 1-5 stories about companies (and increasingly the government) trumpeting their latest “open innovation” breakthrough. I am convinced that half the PR people (or execs sponsoring the underlying initiatives) couldn’t articulate a recognizable definition of open innovation.

In talking about this in conjunction with the creation of the Open Innovation Community, I found that Henry Chesbrough has a similar news watch. I’m concerned that faux open innovation will muddy the waters and confuse the market; also, from a research standpoint, a theory of everything is a theory of nothing. However, Henry is more inclined to give them the benefit of the doubt, perhaps because he is a more optimistic person.

The issue came up earlier this year in a press interview. Orange Silicon Valley (a branch of the French mobile phone company) hired a former WSJ technology writer to prepare a 48-page report on the future of Silicon Valley. This included interviews with 10 Silicon Valley experts, including California’s second most famous open innovation researcher. Here is an excerpt:

Do you think the phrase is being overused?

We don’t have a term for it, but there is an Open Innovation equivalent of “greenwashing.” Greenwashing is where people wrap themselves in claims of environmental-friendliness, but don’t change their actual practices to make their products more marketable.

When I use Google to see how corporations use “Open Innovation,” I’d say only about a third of it is really legitimate; the rest of it is just people want a buzzword to make themselves seem more innovative and more trendy.

In many cases, when they appoint a VP for Open Innovation, there is an attitude change and they really are being more collaborative. At other times, it’s just a new name for something they’ve always done, and they’re just calling it something else.

I was thinking of a particular example three years ago when one of Silicon Valley’s most respected companies renamed their university relations office to be their open innovation office.

However, I was a little more encouraged in looking through the news articles that Google emailed to me in November (thus far) — perhaps more encouraging than when I started the news watch four years ago.

Two sorts of articles have been there consistently throughout. One is for the crowdsourcing companies that are seeking to match firms with external suppliers of ideas — certainly a form of open innovation, but (as I’ve found in my research) tending to be narrowly focused on just the sourcing aspect.

The other common thread are stories that treat “open source” as synonymous with “open innovation.” The two terms are not synonymous: there’s an overlap in some cases but they are disjoint in other cases. This is the sort of misuse of the term I’m trying to discourage.

And yes, I saw a certain amount of greenwashing-type usages, using the buzzword for PR purposes. Alas, some of this is being done by the US government: small high-visibility innovation efforts don’t make a $3.5 trillion/year bureaucracy innovative — any more than banning iPad purchases make it efficient.

Still, what I found in this month’s data was more encouraging than I expected to find. One example was this news item from last week:

XYZ Corporation has announced a new Web portal to support its existing Open Innovation program. The new Web portal will increase the pace of innovation, in targeted areas, by improving XYZ Corporation's ability to leverage outside resources.

At the one level, this is the same as hiring Innocentive or Nine Sigma to find new technologies. On the other hand, the effort of setting up a portal demonstrates a greater level of commitment to OI — and perhaps to act upon these ideas — than a few experiments with outsourced crowdsourcing vendors.

Overall, I think the trend line is encouraging. There’s more real open innovation happening in practice, and perhaps even a higher proportion of it is real.

Integrity means don't hide behind your lawyers

The private equity investors who flipped Skype (from eBay to Microsoft) have decided to screw some of their employees out of their “vested” stock options.

The issue came up when one Skype employee, Yee Lee, found he forfeited his stock appreciation rights when he left Skype before the acquisition. He summarized his problem on a blog post last month.

Corporate lawyer-turned-law-school-professor (and New York Times pundit) Steven Davidoff summarized the controversy in two postings at NYT DealBook. (Not yet behind the paywall).

In the first article, he noted that PE firm (Silver Lake) could have settled the controversy for less than a million bucks. He attributed the decision to a culture clash between NY financiers and SV venture capitalists. The former is not about reputation or honor, but money.

But in Silicon Valley, the community is not only smaller, the people work together again and again, and so trust and reputation are valued more highly. On his LinkedIn page, Mr. Lee alone lists more than 10 companies where he has worked. When you are going to see and work with the same people repeatedly over many years, $1 million is small change to buy their needed loyalty.

Davidoff argues that while VC has a better reputation, both sides add value equally. Of course, he is a former NY lawyer who advised big companies on their acquisitions.

But the reality is that while VCs do is equally greedy and lucrative, what they do is more rare and economically valuable. Restructuring can be (and has been) done by PE firms, managers who lead a MBO, more traditional corporate acquirers, or even in-house executives with the proper incentives. Best practice in operational efficiency disseminates pretty quickly, so very little about the PE business model (or their value add) is protectable over time.

In a second article, Davidoff concludes that employees are just as likely to be screwed by carefully hidden legal mumbo-jumbo by Google or a raft of other recent startups. (What we don’t know is how each company verbally represented this clause — did they call attention to it or did they bury).

Davidoff’s solution to both cases is that the employee should see a lawyer. (In other words, his philosophy is to create a full employment act for his peers and his students).
In a narrow legalistic sense he's right — that is if Lee were lucky enough to find a lawyer with the right kind of experience. As an entrepreneur, I lost $50,000+ on a business deal that was vetted by my lawyer; my lawyer (of many years) didn’t understand my business well enough to anticipate the scenario that played out, I didn’t volunteer it and he didn’t ask.

However, more seriously, this sort of “ask a lawyer before doing anything” causes an unaffordable drag for startups and their employees. Yes,it might only be $500 for the one consultation that spotted the problem, but it’s also $500 for all those other times where it wasn’t necessary but you paid the lawyer just in case.

There is a non-lawyer solution: we acknowledge that there are fundamentally two types of options: those that actually vest, and those that are only exercisable by current employees.

If the ideas of the incentive stock option is to incentivize employee, then the terms and conditions should be clearly articulated in plain English. If necessary, the state or federal government should require employers to spell it out. (Banning misleading practices is the one place where I believe in aggressive government action.)

I once heard ethicist Michael Josephson say on his radio segment: "Integrity means doing the right thing when nobody’s looking.” (The original author is lost, but similar remarks have been made by quarterback-minister J.C. Watts).

In Davidoff’s world, employers and employees are adversaries using lawyers to duke it out even before conflict arises. In a company with integrity — the only sort I’d put my name to — the terms and restrictions for employee compensation are clearly explained in a way that every employee can understand. As an added benefit, doing the right thing makes sure that the employees and employer have their goals fully aligned (at least until after the end of the lockup period).

California: a tale of two states

California is both the best and the worst place to do business, according to a ranking of state business climates by CNBC. The rankings call attention to our ongoing problems — not likely to be solved anytime soon — in retaining and growing local businesses.

The state is worst (tie with Hawai‘i) in terms of cost of living, 49th in business friendliness (regulatory obstacles) and 48th in the cost of doing business.

However, it’s tops in access to capital — as defined by venture capital — and technology & innovation.

As the Orange County Register notes, the former is no great distinction:

The access to capital measure is extremely narrow. California benefits from having the Silicon Valley, which received 42 percent of venture capital in the first quarter, according to the Moneytree Report by PricewaterhouseCoopers and the National Venture Capital Association based on Thomson Reuters data. But only 212 companies received money. California has more than 1.3 million employer businesses, according to the Employment Development Department.

In other words, this “access” to capital is no great consolation to the 99.5% of companies that never get any VC: they still have the high cost of living and excessive regulation without any of the benefits.

In other words, there are two California business climates. For high tech companies — particularly young ones — it’s a great place to be. For the rest of the companies, it’s awful, although if you’re a doctor or a dry cleaner or a home builder, it’s where 12% of the country lives.

Not surprising were the two states on top — Texas and Virginia — with some of the most pro-growth policies in the country and relatively healthy economies. (Economist Arthur Laffer argues that it’s no coincidence that these and other right-to-work states have higher economic growth than more pro-union states.)

What I considered somewhat surprising was how badly California fares on the education rankings — 31/50. The state’s onetime dominance in higher education is jeopardized by the ongoing economic mismanagement in Sacramento, while the problems of the K-12 system are well documented.

If the findings of the survey are to be believed, those companies that have a choice will continue to vote with their feet, which does not bode well for an economic recovery.

While the problems are not new, I would have thought somewhere along the way there would be more of a sense of urgency to change what’s being done. Instead, politicians are voting the same way they voted 8 years ago, public employees are digging in their heels, and the big companies are largely sitting this fight out.

Certainly within the Silicon Valley bubble, the haves in the elite companies continue to assume life will go on as usual, while those with incomes under $100K wonder how they will afford a tax increase (if the legislature has its way) or private schools for their kids (if public schools continue to suffer).

It’s not like I have a choice: I was born in California and will likely die here. I wish there was a way out of the declining business climate, but it appears the voters (and thus their elected representatives) have been seduced by the myth that “tax the rich” is a painless way to spend money without having to pay for it. (Until of course the rich move elsewhere.)

Keep swimming or die

Tonight we had two Silicon Valley veterans come talk to SJSU business honors students about how to maintain and develop their careers. Last fall, I heard these same speakers — Matt Ready (BSBA, San Jose State) and Steve Erickson (BSEE, New Mexico State) — give solid advice on building a startup management team.

Both speakers emphasized to the graduating seniors the importance of (as Matt said), being a “self-motivated team player that will be a leader rather than a follower.” Or as Steve said, “If you show initiative, you will be rewarded with more work and more responsibility.”

The lessons of high-performance SV tech companies resonated with my own experience in San Diego-area tech companies.

The culmination was Matt’s observation that “once you're in your comfort zone, you’re stagnant.” His signs of being stagnant:

• “only doing what is asked of you”
• “not learning anything new”
• “no initiative to help others outside your job scope”

He advised students: "make sure you're leaning forward, not sitting back.”

Two of my older management honors students offered related observations. One said it‘s time to leave when you dread going to work. The other said that if you try to solve a problem of the company, it will be recognized in a future round of promotions or layoffs.

Together, the speakers supported two of our faculty insights from last week regarding the nature of Silicon Valley — its dynamism and the vibrant corporate culture of the most successful firms. Or as Matt said, “the dynamic in this valley is change.”

To which Steve added two pieces of advice to students: “Those that adapt to change quicker will move up quicker” and that students should "pick the opportunity that fits you: you have to like what you do."

This resonated not only with our faculty discussion last week, but also with my own career. This philosophy described my first decade of work experience, before I started my own company — including the restlessness that caused me to quit a good well-paying job because I felt blocked for promotion.

This also brings to mind the familiar metaphor that “Sharks have to keep moving forward or else they will die.” Apparently this is not strictly true*, but it does capture the image of a restless, ambitious innovator who seeks continuous improvement.

Or, as the old HP ad campaign claimed: “We never stop asking ‘What if?’ ”

* Apparently some sharks must swim forward or they will drown, while others can breath just fine.

Capturing Silicon Valley in a bottle

As part of meetings today at San Jose State about shaping a new Silicon Valley-specific business program, one of the key questions that came up was “what is Silicon Valley?”

At the SJSU College of Business, we have been quite successful in preparing firms for careers with Silicon Valley companies, supplying more graduates to these companies than any other university. To a large degree, this has been a serendipitous benefit of our location — and the sort of ambitious, first-generation college students we attract.

As part of our brand-building and shift to fee-supported (rather than taxpayer-supported) programs, the college is working to increase the Valley differentiation of our programs. Much like Evian, Perrier, Arrowhead or Calistoga, our challenge is to bottle what’s special about our backyard and export it to the rest of the world.

In today’s discussion, my friend and colleague Dr. Michael Merz, described Silicon Valley as a brand used to market the region to the rest of the world. This is not surprising, given that he’s in the marketing department — and given that he came to Silicon Valley three years ago from Germany (via Honolulu).

Michael noted the three pillars of the Silicon Valley brand

1. Technology
2. Innovation
3. Entrepreneurship

The latter perspective is also not surprising, since he’s the professor for our entrepreneurial marketing class (and we both serve together on the Silicon Valley Center for Entrepreneurship)

Although I completely agree with Michael’s list — exactly the list of why I came to San Jose State almost nine years ago — my immediate reaction was that he left something out: dynamism.

4. Dynamism

Silicon Valley is not just about technology entrepreneurship. It’s also about the Schumpeterian “gales of creative destruction” bringing both corporate death and new life.

Yes, the Valley headlines and headcount and revenues and tax dollars are disproportionately tied to the proven Fortune 500 tech companies such as HP and Intel and Apple and eBay. But other places in the world (Boston, Seattle, Seoul, Tokyo) also have successful tech companies.

What makes us unique is how common to find a middle-aged professional who’s worked for four or five companies, with at least one company that’s no longer around. Around here, working for a dead company is not a mark of failure but a badge of honor.

This was brought home last month at the COB alumni banquet last month, where one of our alums talked about how he took his business degree and stumbled into a 25-year career running tech companies. Dan Doles has been CEO or founder of three software companies so far, in between working at Ernst & Young and running Oracle’s sales operations.

He’s hardly alone: in my nearly nine years, I’ve met many others who fit the same profile (in part because the COB development officer makes a point to bring them back to campus to speak). At the same banquet was Melissa Dyrdahl, whose tech career spanned HP, Claris and Adobe. Another bachelor’s alum who’s spoken at SJSU is Dave Wickersham, then COO of Seagate. Two other tech veteran speakers I’ve heard were MBA grad Larry Boucher and Amir Mashkoori (who has both undergrad and graduate degrees from us).

These and other alumni exemplify a career driven by (as one colleague put it) “the hunt for ‘what’s the next challenge’.” This is the path our top students will take, and our challenge is to figure out how to prepare them for this path.

In one of my more tactless moments today (in an academic career filled with tactless moments), I wondered how unionized tenured public employees can prepare themselves to capture this dynamism for students. We are the antithesis of what we want to convey. I fear that even the most enthusiastic and talented teacher (of which we have many) will eventually be worn down under the weight of bureaucracy and serving in the same job at the same rank with the same responsibilities for 20 or 30 years.

Our dean, David Steele, spent 25 years in roles ranging from IT and finance to operations before becoming president of Chevron Latin America. I wish there was some way for university faculty to similarly be cross-trained on various disciplines so that we could prepare our students for similar careers.

5. Corporate Culture

The other thing about Silicon Valley that gradually came up was the corporate culture. It was (and is) not something found in all local companies, but it was/is found in the best ones. I argued that we should teach our OB intro class around running one of these companies, rather than the more generic model of corporation captured by the MBA textbooks.

This Silicon Valley culture treated its people as its greatest assets, and empowered them to do great things. In retrospect, it was associated with high-margin businesses supported by successful innovation-based differentiation strategies, and epitomized by what some consider Silicon Valley’s first startup: HP.

The engineering paradise of Bill & Dave may be gone for good. However, Cisco and Google still treat their full-time employees very well, as do other tech companies like IBM and Qualcomm.

Apple — founded explicitly to replicate the HP culture that Steve and Steve so admired — in the Jobs II era seems to have created a new lean production version of this culture. This may not make the “best places to work” list, but it does enable its employees to concentrate on making insanely great products (and capturing insanely great stock gains) rather than fighting stultifying bureaucracy.

Of course the key here is margins. DEC and Motorola and Nokia were all great places to work when the margins were good, but became miserable when they crashed due to the rise of strong competitors or substitutes.

So this goes back to a point I’ve been making to my best students for the last three or four years: do everything you can to work for a high-margin company. They treat their people better, the working conditions are better, the job is more fun and there will be more opportunity.

The future of Silicon Valley — and its global mindshare as a brand — depends on our ability to create more of these companies, and for the established firms to renew themselves and their product lines.

The Siren Call of Silicon Valley

The morning paper reports that Dell is the latest major IT company to be lured by the sirens of Silicon Valley. I suspect it won’t be much more successful than any of its predecessors.

The Merc leveraged Dell’s Tuesday press release to extend their report last week that the company was leasing 240,000 square feet in Santa Clara, and had 341 open jobs posted in the Bay Area.

The Dell news release summarized the decision:

Dell today announced plans to open the Dell Silicon Valley Research and Development Center, a new facility that will support Dell’s strategic expansion of solutions capabilities, including the areas of networking design and development, storage development and cloud computing. The new site complements Dell’s Israel Research and Development Center, announced last month in Ra’anana. Dell believes that with recruitment of additional staff, its workforce at the Silicon Valley site will grow to more than 1,500 team members over the next five years.

The new facility will allow Dell to consolidate much of its current Northern California operations in phases over the next several quarters. It will combine the operations of several area companies Dell has acquired, including Zing (Sunnyvale), Ocarina (San Jose), Scalent (Palo Alto), and Everdream (Fremont) into approximately 240,000 square feet of leased space in two adjacent buildings on Great America Parkway in Santa Clara.

In other words, Dell’s decision to expand here was largely motivated by the need to more effectively manage its SV acquisitions.

This is exactly parallel to Qualcomm’s decision almost four years ago to buy a 320,000 square foot campus to consolidate its own Bay Area acquisitions, notably SnapTrack (which later made Steve Poizner a household name) and most recently Atheros. The only difference is that Qualcomm bought its land — and thus appears here for the long haul.

The older Merc story notes two foreign telecom companies expanding here recently: Huawei and Nokia (although Nokia’s research center has been in Palo Alto for at least five years). Motorola, British Telecom and Deutsche Telekom are also here, as are most of the Japanese electronics companies and SAP of Germany.

But will it matter? Perhaps the sirens of Silicon Valley won’t be luring Fortune 500 (or Global 500) companies to their deaths, but will they actually help these firms succeed?

Digital Equipment Corp. (DECWRL) and Xerox (PARC) had major research labs in Palo Alto 30 years, but they did nothing to stem their eventual declines. IBM invented the disk drive and the floppy disk in San Jose, but then dumped that operation to Hitachi in 2002 and now the Cottle Road facility is a strip mall. (The still have their 1977 Santa Teresa Lab and their 1986 Almaden Research Center, but both are at the edges of the valley and not closely integrated into it.)

So for Dell, Qualcomm and others, the Silicon Valley branch office provides a convenient way to integrate acquisitions (and for the startups to find a friendly acquirer.) But I can’t think of a single example of a foreign or US company whose SV operations have made a significant difference in their ultimate success: the key decisions are made elsewhere, and most of the value is added elsewhere as well.

The new Borg

In the march towards Total World Domination, with the recovery of its stock and explosion of Android, Google seems to be in the driver’s seat. But what captures this march? If Microsoft is the Beast of Redmond or the Borg, then what is Google? For two years I’ve called it the Monster of Mountain View, but it is only rarely used.

Perhaps the “Borg” metaphor is more appropriate nowadays: not because it’s relentlessly crushing enemies, but the way that it’s inhaling raw talent. Particularly over the last two years, Google has the pick of Silicon Valley when it comes to recruiting as most IT companies are fighting the relentless march of commoditization. It’s #4 on the latest Fortune list of best places to work — the only Silicon Valley firm in the top 10 and one of three in California (the others being DreamWorks and Qualcomm.)

Meanwhile, the once-great HP is locked in a commodity business and has been cutting pay for several years and laying off workers for a decade. Meanwhile, Google is raising salaries 10%, and with it operating expenses by nearly 4% ($400 million). Because the generosity depressed GOOG stock, Google reportedly fired the employee who leaked the memo.

What I find anomalous is how the company is not just hiring from industry, but also inhaling bright minds from academia. I’ve know engineering and C.S. types to take a rotation in industry, but it’s much less common in business or economics.

Three years ago, Google convinced once of the world’s most senior information economists, Hal Varian, to leave Berkeley where he was a chaired professor and former dean of the Information School. Varian converted his temporary leave (one of the perks of academia) into retirement, according to his Berkeley website.

Less visibly, at the same time Google also landed Josh Mindel, an assistant professor at San Francisco State’s business school. This year they took Dave Mease from the SJSU b-school — right now David is on leave, but the flow of talent into Google seems to be similar to the flow of matter into a black hole.

As someone who used to work in industry, I can see both sides. Academia (post tenure) has unmatched job security, good medical and retirement and an unmatched degree of personal autonomy. Going to Google would probably mean a 50 or 100% pay increase, stock options and resources to pursue any interesting problem. Google’s 20% time plan also provide an intellectual freedom unheard of in industry.

The one question mark is: how long will it last? For the best jobs at AT&T — Bell Labs — the golden age extended across more than five decades. For IBM, the comparable period was about 30 years, while for Apple it was only a decade. Microsoft Research still seems to be offering attractive working conditions, but for ordinary employees the bloom went off when the stock options stopped being valuable.

So how long will Google’s run last? Absent draconian regulation — antitrust lawsuits ala AT&T and IBM — it could be a great place to work for another decade. However, the end at IBM, Apple and Microsoft came with unexpected swiftness, so I wouldn’t bet the house on it.

Update Nov 19: Google has now hired tenured Harvard CS prof Matt Welsh; his colleague Michael Mitzenmacher rationalizes why he’s not jumping ship (yet). H/T: Youngjin Yoo.

Everyone wants to be Silicon Valley

For decades, politicians and business leaders from the rest of the world have come to Silicon Valley, wanting to create the next Silicon Valley.

From research of people like Martin Kenney, Anna-Lee Saxenian, Tim Sturgeon and others know the relevant list of preconditions for SV"s success.

Technology from universities, good industry-university relations (as in the Terman era), entrepreneurial culture, entrepreneurial infrastructure and last (but not least) venture capital. Oft-copied, these explanations for SV’s success might be necessary, but they do not appear to be sufficient to create a high-tech cluster.

And of course the other requirement for a cluster is to, well, be clustered. Spillovers happen in a cluster due to VCs visiting companies, universities talking to companies, and workers changing jobs — limiting the size of a cluster to (roughly) a radius of a one hour commute.

Meanwhile, since the end of the dot-bomb era, Silicon Valley has struggling with its raison d’étre, with many assuming that its salvation will be “clean” technologies such as renewable energy, energy efficiency and better life cycle consideration of material use and waste.
At the InterSolar trade show Wednesday, I picked up a renewable energy industry trade magazine enerG, which devoted its closing column to adapting a speech by Obam’s commerce secretary, former Washington Governor Gary Locke:

U.S. Needs to Become the Silicon Valley of Renewable Energy
…
For the Record is an edited excerpt of a speech … in Washington D.C. in February.

Two observations about the dubious economic logic of this article:

• First, an entire country cannot be a regional cluster. Even in biotech — perhaps the most fragmented of America’s high tech clusters — leadership is concentrated in the Boston and San Francisco regions, with San Diego a distant third.
• Secondly, if some place is going to be the Silicon Valley of renewable energy, why not Silicon Valley? That’s certainly what local entrepreneurs have had in mind for the past three (or even five) years.

However, to be fair to Secretary Locke, the original speech only warned against a future in which “Shanghai became the Silicon Valley of clean energy.” So the confused clusterology of the headline is due to the magazine editors, not a politician and lawyer.

Scientists of the Future! Thursday Only!

This week, the annual Intel International Science and Engineering Fair is at the San Jose Convention Center. The fair brings 1,500 high school students from 53 countries who compete for $4 million in awards and prizes.

The fair is open (free) to the public on Thursday 9am-9pm, with student contestants present at their projects from 10am-2pm.

I spent Tuesday night and Wednesday morning judging science fair projects, as one of 100s of special judges (not counting 1000+ regular judges). Although I have judged county science fairs for the past 22 years, I found the projects really fascinating.

In the best projects, the students were completing what could be a senior (undergraduate) thesis, or even a master's thesis. Even for the ones that don’t reach that level, the sorts of problems they choose — and the solutions they found — are stimulating in a way that you can’t get by looking only a products that make it to market.

The fair is run by Science for Society and the Public (a DC nonprofit) with named sponsor funding by Intel as part of its (admirable) education initiatives. However, Intel was almost invisible: beyond some Intel T-shirts it otherwise lacked an obvious presence.

Instead, the company that was most prominent was the “premium sponsor", i.e Google. It was showing one of their (once top-secret) Street View cars at the center of its booth, as well as peddling various software (Apps, SketchUp) and SaaS offerings.

Overall, Google’s presence suggested a calculated effort to convince these smart kids that working at Google is the ne plus ultra. Was Intel absent because it’s not hiring? Because it no longer has the slack resources to be actively involved? Or because it was outmaneuvered by Google?

The awards are handled out Thursday and Friday, and then the kids fly home. Next year, Los Angeles will host the fair, as part of a three year rotation with Phoenix and Pittsburgh.

Leading the mobile revolution — for now

Feb. 22: see the updated artwork below.

As I’ve remarked before, the Silicon Valley hometown crowd seems convinced that this is the best possible place in the world and will remain so until the end of time. Like onetime Stanford prof Andy Grove, my view is that it’s better to run scared.

So to my eyes, the headline in Friday’s SJ Mercury (over an AP story) seemed to veer onto the dangerous side of triumphalism:

Cell Phones
Wireless Turf Fight
Valley giants Google, Apple moving in on carriers

By Peter Svensson
Associated PressBARCELONA, Spain—Silicon Valley is looking like a winner in the tug-of-war with wireless carriers over who will control the new world of Internet-connected phones.

I’ve remarked on the Merc’s excessive optimism before, which earlier this year included overstating the influence of our still-small local cleantech industry (when clearly China is dominating key high-volume, cost-sensitive segments like solar panels.)

The sidebar — which appears nowhere on the Merc website (or the web) — is even more upbeat because (I’m guessing) it was written by a Merc editor:

Score One for the Valley

What's happening: Developments in the wireless world are playing into the hands of Silicon Valley's PC- and Internet-oriented industry, led by Google and Apple.

The opposition: Wireless carriers see Web companies reaping revenue from add-on services such as Internet searches and downloaded applications, and ned to figure out how to profit in an Internet-dominated industry.

For consumers: Internet-oriented smartphones provide more choice and freedom. But the way we pay for wireless service is likely to change, as data becomes more important than voice minutes.

Sure, claims made 5 years ago that the US is irrelevant to the mobile industry now appear foolish. And the success of Apple and Google also show how the value proposition of the Mobile Internet owes more to the Internet companies than the Mobile ones, and that carrier power has been eroded by their success. I remarked on all three points in my forthcoming iPhone paper (now available at Telecom Policy)

And, in fact, a later AP article by Matti Huuhtanen in Helsinki conveys the concerns of the industry’s longtime leader:

Nokia Chief Executive Olli-Pekka Kallasvuo concedes the Finnish company is under pressure. "There is no doubt the center of mobile innovation has shifted from Europe to Silicon Valley. We are working to tap into this innovation," Kallasvuo told analysts earlier this month. He said Nokia had installed more than 3,300 employees in North America to redress the balance.

Certainly in the near term, Google’s mobile platform bet seems like a sure thing — since for mobile search revenues, they have a “heads I win, tails you lose” bet on any platform with a decent web browser. But all the local tech companies know they can be dislodged — with names like Sun Microsystems and Netscape to remind them that market share in IT (unlike sugar water) is highly transitory.

Overall, I doubt many established SV companies are coasting on their laurels. Meanwhile, the small ones are a long way from having the option of coasting, trying to survive the second VC “nuclear winter” scenario in less than a decade.

Update Monday 8:30am: From England, David Wood comments on a similarly triumphalist article in Fast Company, and in response quotes this Steinberg-inspired poster by Rubicon Consulting (7 miles from where I sit) that suggests such boosterism is chronic in the Valley.

Note to readers: Normally I’m reluctant to comment on the local paper, but I keep getting emails from readers elsewhere in the US and world — including one this morning from Hyderabad (via Philadelphia).

Not so secret SV leaders

The lead story on the Merc Sunday blared

10 Silicon Valley Superstars*

*who you’ve never heard of
[by] Chris O’Brien

The ten names:

• Tim O’Reilly, founder of O’Reilly Media
• Steve Blank, serial entrepreneur, Berkeley lecturer, and author of The Four Steps to Epiphany
• Dave McClure, blogger, startup executive, and Stanford lecturer
• Susan Wu, CEO of Ohai, developer of online games
• Kevin Surace, CEO of Serious Materials
• Marnie Webb, co-CEO of TechSoup Global
• Charlene Li, former reporter, industry analyst, consultant, blogger and co-author of Groundswell and Marketing in the Groundswell
• Craig Hampel, a senior fellow at Rambus
• Lisa Stone, co-founder/CEO of BlogHer and a blogger
• Vish Mishra, president of TiE Silicon Valley

I liked the premise of the story — there are some movers and shakers that most people haven’t heard of, and that people should know more about them. However, I don’t think they’re quite so unknown. Fortunately, the online version has the same content without the misleading headline.

I’ve met three of them. I can’t imagine anyone who’s done anything in open source who hasn’t heard of Tim O’Reilly and his publishing house; he also popularized the term “Web 2.0.” While I’ve heard his speeches, we only met briefly at a social event after an open source trade show (probably OSBC 2004 or an early LinuxWorld).

I also can’t imagine there are many active in the tech industry who haven’t heard of Vish Mishra and TiE. In my case, he’s a friend of a friend (one of my co-workers), but actually I first met him in 2005 when he took my picture with then-CEO Irwin Jacobs of Qualcomm.

OK, the third one is a fluke. I happened to sit at the same table as Kevin Surace earlier this fall, and when I got home, the more I learned about his company the more serious it appeared to be. I’ve since blogged on the company and interviewed Surace for my study of local cleantech companies.

Overall, I thought it was an interesting list, and O’Brien communicates a few interesting points about each in a small amount of space.

However, as someone who spends most of his days with students and college professors — not wandering Silicon Valley — I’d bet that most of the Merc’s readers who work in the tech industry have met 2 or 3 of these “never heard of” types. But as a former reporter, I’d be inclined to blame the copy editor for the exaggerated headline, since O’Brien makes no similar claims in the body of the article.

Startup Success: the importance of Plan B

A month ago, in my Engineering Entrepreneurship blog, I noted an essential skill that entrepreneurs need: the flexibility to find. Or as I wrote:

Many if not most tech entrepreneurs eventually face a wrenching problem: when do I give up on Plan A and go to Plan B?

As it turns out, a friend of mine, John Mullins has just co-authored a book called Getting to Plan B: Breaking Through to a Better Business Model, released last month.

John is still in London, but his co-author lives here in Silicon Valley and is familiar to both SV denizens and entrepreneurship students alike: Randy Komisar, author of The Monk and the Riddle.

Randy is talking about their new book Tuesday at 7pm in Menlo Park, in an event sponsored by SVASE. It’s an important topic, and I hope some of my readers will be able to make.

Academic victory for open standards

One of my major research (and blogging) interests has been on the open-ness of standards. A particular pet interest has been on semi-open standards — how firms decide which elements of openness to offer and which ones to block. (I’m also interested in how open standards relate to other aspects of innovation openness such as open source and open innovation).

A decade before I even knew there was an academic literature on standards, there were four academics cranking out the seminal work on the fundamental economic principles of standards creation and adoption — a literature known as network effects. Writing in two teams, journals like American Economic Review and Journal of Political Economy were filled with papers by Michael Katz and Carl Shapiro or Joseph Farrell and Garth Saloner. (Katz was also an FCC economist and Shapiro a Justice Dept. antitrust economist).

My dissertation is filled with references to these two themes, as well as to Information Rules, the HBS book Shapiro co-authored with Hal Varian.

One paper I did not fully appreciate until recently (because it appeared in a journal most libraries don’t carry) is a 1990 paper on open standards by Saloner. I am often proud of my chapter on open standards (in a 2006 book on the economics of standards), but it’s now clear that Saloner was the first to seriously consider openness in standards as an intentional tradeoff.

All of this is a long intro as to why I was intrigued by a Stanford press release issued Tuesday:

Economist Garth Saloner, a scholar of entrepreneurship and business strategy, will be the next dean of Stanford University's Graduate School of Business, President John Hennessy and Provost John Etchemendy announced today.

Saloner, 54, who joined the Stanford faculty in 1990, is the Jeffrey S. Skoll Professor of Electronic Commerce, Strategic Management and Economics, and a director of the Center for Entrepreneurial Studies at the Graduate School of Business. He will succeed Robert Joss, who is stepping down after 10 years as dean. Saloner's appointment is effective September 1, 2009.

In addition to his prodigious research, Saloner is credited with helping to lead Stanford’s particularly complex re-architecting of its MBA curriculum.

What I find particularly interesting is Saloner is one of the few people within GSB that seems to care that Silicon Valley can be found just outside the boundaries of “The Farm.” Rather than local problems of interest, most of the faculty of GSB are oriented towards an international disciplinary audience such as economics, sociology, psychology, or applied math. At Stanford, the greatest concentration of Silicon Valley-oriented business scholars are found in one department of the Engineering School.

Will Saloner’s appointment make the GSB (and its new Phil Knight Management Center) a new hotbed for the study of Silicon Valley entrepreneurship? Or will the institutional norms of the various fields drown out whatever preferences the dean and local alumni might have? Stay tuned.

References

Garth Saloner, “Economic issues in computer interface standardization,” Economics of Innovation and New Technology, v. 1, n. 1 (1990), pp. 135–156.

MIT, Stanford and Silicon Valley

On Sunday, the Merc published a long article claiming that Stanford has for 100 years been the center of entrepreneurship in the Bay Area if not the whole universe. I immediately started writing a rebuttal, but when I was done I decided to post it to my blog on engineering entrepreneurship.

Stanford and the Silicon Valley are unique in the world, and it’s understandable why so many people look here for a model as to how to encourage tech entrepreneurship. However, I think the reporter exaggerated the case for effect’s sake — although local boosters are also prone to exaggerating too.

To boil down my rebuttal arguments, the first point was that there were not a lot of significant Stanford tech spinoffs until the banner year of 1982 (Cypress, EA and Sun). Stanford didn’t even have an entrepreneurship policy until the 1950s, and that was driven by a need to raise money. Yes there was HP, but one company does not a trend make. (I’m grateful to Silicon Valley historian and native Stephen Adams for helping me with the details).

The second point was that there was an acknowledged home for electronics-based entrepreneurship in the US for more than 50 years: it's called MIT (yes, my alma mater). In the early 20th century, MIT created some of the most durable models for industry-university collaboration, as documented by Henry Etzkowitz. MIT also provided the founders for companies from Raytheon and TI to 3Com and Qualcomm, as well as educating some of the key technologists who created Silicon Valley. (OK, now who’s sounding like a booster?)

If you believe the rankings, MIT is still the top electrical engineering program in the country — a position it has held for a century. (This year it’s tied with Stanford and Berkeley in one ranking, which certainly seems plausible given the strength of all three schools).

What’s different is the environment: Massachusetts was a good place for creating tech startups in the 1960s, but it fell dramatically over the succeeding decades. On the Left Coast, there’s no disputing that the transformation of the Peninsula over the past 30 years has made the Valley a much better environment for launching a high-tech business.

So to a large degree, Stanford benefits from what’s in its backyard — the firms and infrastructure created by the industries that grew here in the 1960s-1990s. Some of these firms were by Stanford alums, some were not. In fact, MIT alumni have been taking jobs in the Valley for 30 years, and today I’m among MIT alumni coaching other alumni who want to launch tech startups here.

When did Stanford pass MIT as the top hub of tech entrepreneurship? I’m guessing the evidence would point to sometime in the 1980s, when many successful Silicon Valley firms were created and IPOs demonstrated the advantages of working for a startup.

Since the data is too messy come up with an exact date, any further efforts to nail it down is fodder for a two-beer argument. Anyone want to share a pitcher and come to a definitive answer?