The Silicon Valley dream has always been about getting your company to the point where complete strangers are able and willing to buy stock in it. Sixteen years ago, a start-up called Eagle Computer Inc. underwent that fabled rite of passage. Eagle President Dennis Barnhart celebrated the day of the stock market debut by drinking with friends. Then he got into his new red Ferrari. When he reached the highway, he hit the gas. Isn't that the point of having a new Ferrari?
Barnhart crashed through a guardrail and was killed. Eagle Computer didn't last much longer. What survived was the moral, a kind of object lesson that the grizzled oldsters here would pass on to the wannabe entrepreneurs, kids fresh out of engineering school who had nothing but a dream of taking technology to the masses.
Sure, you can get rich here, the wise old hand would say. That's allowed; it's even expected. But don't flaunt it, don't be obnoxious about it, don't get carried away. Because that's what Dennis Barnhart did, and look what happened to him.
If the newbie needed the positive kind of lesson, he could visit Intel, the most successful company in the Valley, the one that makes the chips that power most of those computers. The kid could gaze at the offices of the chief executive--Andy Grove for years and more recently Craig Barrett. They've made hundreds of millions, but they work in cubicles.
That was the classic Silicon Valley style. Show no chrome was one motto. Don't breathe your own exhaust was another. Keeping everything low-key had all sorts of side benefits. For one thing, the lack of obvious manifestations of wealth meant that those poor suckers who didn't have stock options--the police officers, nurses, schoolteachers and garbage collectors who keep the Valley running--weren't inspired to burn down the mansions of the rich. And when entrepreneurs kept their wealth tied up in their companies, they tended to end up even richer.
Then came the Internet. Getting rich no longer required an engineering degree, or a factory, or much more than a bright idea. The cash to get going? That's the easiest part of all.
The local moneymen, the venture capitalists, "have so much money they're renting mini-warehouses to store it," Don Valentine told a couple of hundred hopeful entrepreneurs at a recent gathering here.
Valentine, the founder of Sequoia Capital, is one of the wise men in the Valley. In 1995, Sequoia invested $1 million in a bunch of guys who had an interesting way of indexing this newfangled thing called the World Wide Web. Four years later, that stake in Yahoo is worth more than $10 billion. To have a success even one-hundredth as fine is the dream of every venture capitalist.
And every entrepreneur. Everyone wants to get rich, and most days it seems that most everyone here is doing it. And Dennis Barnhart? If his story is remembered at all anymore, the sting is gone. Now he's just a guy who got unlucky.
Money in most places is simple. The more you have, the better you live. Silicon Valley isn't like that. Silicon Valley, even now, has people like Jeff Skoll, who helped a friend found a cute auction service called eBay. The 33-year-old Skoll is worth north of a billion, but the last time anyone checked, he was still living in the same rented group house with the same friends as when he was penniless. No one in New York would understand this, much less do it.
But is Skoll the exception or the rule? Let's check some recent dispatches: In the October GQ, Alan Deutschman wrote a story about Yahoo. He talked to Jerry Yang and David Filo, the two founders, who are worth $8 billion or so each, and to the lesser-known folk who joined early enough to still be worth tens of millions. All of them "exhibit almost no discernible interest in the power and wealth they've already amassed," Deutschman marvels. The employee who was a bookstore clerk still lives in the same apartment he did on his minimal Borders wages. The former graduate student is still living with her parents. "The new status symbol," the article concludes, "is to have money and not spend it at all."
For the other extreme, pick up David A. Kaplan's book "The Silicon Boys." He concludes just the opposite: that Silicon Valley is all about the lust for money. "The rebels of another era have been replaced by MBAs and accountants; yesterday's tinkerers and thinkers have given way to the moneymen and predators. . . . The workaholic pace robotizes people--they have to get rich." Steve Jobs of Apple Computer is quoted lamenting what has been lost: "People care more about material things now."
It's hard to tell which species is more annoying to any reader who still has to punch a time clock for a living: Kaplan's greedheads or Deutschman's soulful folk on whom money is wasted. But there's a lot of evidence that doesn't fit either thesis.
Deutschman doesn't mention that, for example, Yahoo President Jeff Mallett just paid $9.1 million for an estate in Napa Valley. Kaplan doesn't explain why, if most people here are so interested in getting filthy rich, there are so few signs of conspicuous consumption. The restaurants are modest. It's easier to buy a book in downtown Palo Alto than a $3,000 bauble for your cupcake. And even at the most successful companies, like eBay and Yahoo, there are as many Hondas in the parking lot as Mercedes-Benzes.
Clearly, money in Silicon Valley is too subtle for cardboard stereotypes. Maybe the newfangled technology itself will help. Ask Jeeves is an Internet search engine that uses "natural language." That means that you can ask it a question just like you would another human being.
So, Jeeves: Is Silicon Valley a place where greed rules?
Alas, Jeeves responds with an offer to tell you more about a computer game called "Greed" and a movie called "Greed"--not exactly the wisdom being sought. When you ask Jeeves a question that it isn't programmed for, it doesn't do a very good job. Like many pieces of the Internet, Jeeves is more of a hope than a reality, a company that must live for tomorrow--because today it's not much of anything.
Unless, that is, you were lucky enough to invest in it last year. A group of early investors bought stock for pennies a share, putting up a total of $2.5 million. That stake is now worth nearly $2 billion.
It's hard to get your brain around numbers like this--even, perhaps, if you're one of the lucky beneficiaries. There's a disjunction in the Valley between how everyone grew up thinking about money and the way money is now defined.
Twenty years ago, when all but the oldest entrepreneurs were kids back in Scranton or St. Louis, being rich meant having a million dollars. Even the truly wealthy counted their fortunes in tens of millions. It took a long time to build up such capital, often more than a lifetime. It required weathering recessions. It required luck--selling the right product, coming up with the right idea at the right time. It required smarts--no one got rich who didn't have a skill or at least had ancestors who did.
If you worked at some desk job, any desk job, all this was beyond you. If you had any spare money, you put it in a savings account, where it would increase 5 percent a year. It's impossible to become rich that way. You had as much chance of becoming king of France.
All these notions about wealth have been destroyed in Silicon Valley. For one thing, it takes a million bucks just to buy a house. And not a particularly impressive house, either. A three-bedroom, 3 1/2-bath house in Los Altos with--try not to get too excited--a two-car garage? That'll be $1.495 million. A four-bedroom, 3 1/2-bath, with pool, in Hillsborough? Yours for $1.498 million.
Or at least it can be yours if some newly minted dot-com type doesn't decide that he's tired of losing houses to other newly minted dot-com types, and offers the sellers a million dollars over their asking price. This actually happened recently, or so everyone insists, although no one can come up with the guy's name.
The housing situation here is so grim that Santa Clara County, which encompasses about half of Silicon Valley, recently said it will start providing low-interest loans to families making more than $100,000 a year, because even a six-figure income doesn't mean you can afford a house.
But if it requires vast wealth by historical standards to own a house here, it doesn't seem to require much effort to get on the dot.com gravy train. Don Valentine, speaking to the Churchill Club, noted some of the rigorous special talents that are necessary.
"Every day I long for someone who can speak three simple declarative sentences in a row," he said, noting that most would-be entrepreneurs "cannot tell a story. The geeks of the world start at the sub-literal level and almost never rise above it."
Got an ability to spin a yarn? You, too, can form a company in January and sell it in July for a couple hundred million.
No idea is too small. After seeing companies become successful by posting people's bookmarks and personal calendars on the Web--services that no one ever thought needed to be on the Web in the first place--Oliver Muoto, a co-founder of the successful Internet company Epicentric, had an idea for a new start-up. Why not a Web calculator company?
The target market: Everyone! Everyone uses a calculator. Wouldn't it be nice to do your calculations online, have them accessed universally from any Web browser in the world, share calculations with friends (or in the case of past-due rent, ex-friends and ex-roommates)?
In fact, he realized enthusiastically, you could build a whole Web community based around calculation. And it's viral--users would be able to e-mail important calculations to friends and relatives all over the world, who would in turn churn out their own equally impressive math problems and continue to spread the word.
Muoto thought he was making a point about how ridiculous some Web sites were. Then, a couple of weeks ago, he learned that a company called Halfbrain.com was doing a variation on the Web calculator idea.
Everything's being tried now, a fact that should have been obvious when two Internet companies--Dogdoo.com and Crapogram.com--began vying for customers. Both promise to send their signature product to any of your enemies.
"It's about money, but it's not about greed."
So says a would-be entrepreneur currently casting about for start-up funding. He's willing to talk as long as neither his name, the name of his partner nor too many identifying details are used. Silicon Valley is a cheerful, forgiving place, but even its tolerance might be tested by someone who blatantly admits he's only in it for the money. Which is not to say that everyone starting a company now isn't in it for the money. It's just that you're not supposed to broadcast it.
This fellow is in his early forties, a former employee at a Valley computer company. He and his partner know something of the lay of the land here, which is important. The venture capitalists might have bags of gold for entrepreneurs, but they're not going to give it to just anyone. You have to be properly introduced.
The entrepreneur came up with his idea about two months ago. First thing he did was buy a copy of "Business Plans for Dummies," although he was sufficiently embarrassed to be carrying it around that he covered it with newspaper. It's like carrying a copy of "How to Pick Up Girls." How uncool can you get?
He and his friend came up with an idea, a segment of the market that no one else seems to have taken advantage of--although that may be because it's complicated enough that, even when he explains it off the record, it's difficult to understand. It may be worth billions; it may be worth zip. That makes it perfect for Silicon Valley in 1999, which will generously assume billions.
Once you have a business plan, the next step is to get funding from a venture capitalist. Since so many of their investments in the past couple of years have been successful, they are raising ever-bigger piles of cash from pension funds and university endowments, all looking for the next big deal. The only other option for the entrepreneur is to use his own money, and why would anyone want to do something as silly as that? Maxing out your credit cards to start your Internet company is so 1995.
At first, things did not go well for our entrepreneur. His business plan showed that the company would be profitable in three years and earn the venture capitalists a 20 percent return. Twenty percent! You can make more with the right stock in one day. Twenty percent is a base hit. Venture capitalists look for home runs.
The entrepreneur got the idea, eventually. "Why should the venture capitalists invest a few million for a traditional rate of return when they could spend the same--or preferably more--for a phenomenal rate and astronomical profits?" he asks. "The answer is, they don't. We were all but kicked out of their offices."
The entrepreneur regrouped, went to fresh venture capitalists, told a better story of vast profits lying in wait just beyond the horizon. This wasn't lying, it was just . . . well, spinning. But the venture capitalists want to be spun.
"It's all a con game in the original sense of the word--confidence. You go in to sell yourself, and the more confidence you have, the better. It's a conceptual sell," says the entrepreneur. "The ability to tell a story, to paint a picture for your investors, is paramount. I have no idea if this company is going to fly, but they want to give us reasons to throw money at them."
Once you get the money, the odds of creating a self-sustaining, ultimately profitable company--the IBM of the year 2020--are probably slim to nonexistent. But no one's trying to do that. They just want to create something viable enough for another company to buy.
That's what our entrepreneur plans to do. Unless there's suddenly a huge amount of trouble in the world, like Y2K sending us back to the Stone Age, he has a good chance of making it. "There are no Internet failures," Muoto says. "We've managed to remove most of the risk from the process."
The venture capitalists like our entrepreneur's idea. He's expecting the first check, for a couple million, by early January.
Why Leave Home?
Redwood City is an undistinguished but pleasant community that hit its high 40 years ago, fell into general decrepitude and now has crawled back, thanks to all the ambient wealth in the Valley. As you walk along, you pass businesses that, if you believe the hype here, will soon be as scarce as actual redwoods.
That porn bookstore/movie theater? You'll get your naked women directly over the Net, no longer suffering the embarrassment of a neighbor seeing you sheepishly entering the real-world premises.
The antique store? The Christian bookstore? The real estate broker? Dozens of Web sites are already available to serve you in these specialties.
As for this breakfast joint, when the grocery delivery companies really get going, who will need to leave home to eat ever again?
In the meantime, Gene Hoffman, chief executive officer of EMusic.com, has consented to be interviewed here. Like most Internet entrepreneurs, Hoffman thinks in terms of millions, but he remembers as if it were yesterday what it was like to be a kid for whom $5 was a lot of money.
It was yesterday: We're talking the Bush administration here. Hoffman is all of 24, which makes him one of the youngest chiefs of any publicly traded company in America. He owns 8 percent of EMusic, which means on a good day he's worth $45 million.
By Internet standards, he concedes, this isn't much.
"I'm a peon," he jokes. "Below average. It's weird. There's as many people above as below me here."
Hoffman goes against the stereotype of easy wealth: Despite his youth, he's been in the business for a while. And he works very hard for his paper money.
He started as a computer buff at the University of North Carolina. This was 1995, the dawn of not only the Internet but of Internet advertising as well, so Hoffman decided to create some software that would block ads. He put a company together with some friends in Chapel Hill. In 1996 they were bought out by a larger Silicon Valley company, and Hoffman spent '97 working here. Then that company was bought out in turn.
Hoffman left with an extremely modest pile--enough money to buy a new car, he says--and the idea for a start-up that would exploit the nascent vogue for digitally downloadable alternative music.
The value of EMusic stock has seesawed, mostly down as the field has grown more competitive. It will disappear to nothing if Hoffman doesn't make it a viable company. If a big entertainment company like Sony or Seagram makes a music announcement, Hoffman has about 15 minutes to figure out a counter-strategy. "The pace," he says, "is relentless."
He took time out to get married, to a preschool teacher, but that's the only break he's had. "We wanted to go to Paris, but if you're an entrepreneur and are successful, you have all these other responsibilities. Meanwhile, there's someone out there trying to catch up to you, to do what your company does better. So maybe you won't have any money soon anyway.
"Basically," Hoffman concludes, "money is wasted on the executives of Silicon Valley."
It doesn't impress the servers in hash houses like this one, either. "Hey, do you guys mind leaving?" the waitress says. "You're done, and we'd like to clear the table."
What's It Worth?
E-commerce, browser, search engine, dot-com, portal, spam--of all the words the Internet has given birth or new meaning to, none is lovelier or more fragrant with possibility than "pre-revenue."
To understand what this means, it helps to know that an eternity ago--say, 1995--companies were valued by how fast their sales and profits were growing. This was a sensible system, honed over hundreds of years. The more quickly a company grew, the higher the value the investors put on it.
Then, when the Internet became a commercial entity, companies were so new that they had no earnings, so they were valued by how fast their sales were growing. And since their sales were growing fast indeed, the valuations tended to be high. Profit was just assumed, as soon as the Internet took over the world.
The situation has continued to evolve: In some cases, companies are so new that they haven't gotten around to selling anything yet. They're "pre-revenue," a term that would have gotten you laughed off Wall Street a decade ago.
No longer. Last summer, Lucent Technologies, the huge equipment arm of the old AT&T, bought Nexabit Networks Inc. for $900 million. Nexabit's routers were said to speed material over the Internet faster than anything available. But since they had never been tested outside the lab, it was a pre-revenue deal, at the time the largest on record.
Shortly after the purchase was announced, Nexabit President Mukesh Chatter came from his home in Massachusetts to Silicon Valley to be feted by Red Herring magazine, which named him one of the year's top entrepreneurs.
At the party, Chatter went up to Herring publisher Tony Perkins, thanked him for the highly favorable article the magazine had just done on Nexabit, and said it added a couple of hundred million dollars to the company's price tag. The Lucent folks were all waving the article when they were checking out the company, Chatter said.
Oh, really? Perkins replied. And to think that article was written by someone who knows next to nothing about technology.
Perkins later said he had been joking and Chatter said he might have been exaggerating Red Herring's role a bit, but they both conceded the central point: In high tech, no one's sure what anything is worth. Hype is indistinguishable from fact. Hype is fact. An article in a trade magazine by a reporter making the traditional miserable salary can influence a deal to the tune of hundreds of millions.
The Internet world is full of vast promise. Most deals are done not because of what something is worth now but because of what someone guesses it may be worth in the future. People are gambling on very little information, hoping the day of judgment never comes.
Chatter doesn't agree with this. Some bills come due immediately, he says. In building Nexabit, he particularly regrets the time he had to spend away from his two young children. "I was reading them bedtime stories over the phone," he says sadly. "Once in a while, I didn't even have time to do that. People love to talk about Internet time, where one year equals seven years in the real world. But no one talks about Internet aging--where you age seven years for every calendar year."
At bottom, this is the same worry that Americans have wrestled with for decades. How much work is enough to provide for your family, and how much is too much? When do you say no to that project that will advance your career but keep you in the office on Saturdays? Is it more important to watch your kid's baseball game or attend that crucial meeting?
Success is wonderful, Chatter says, "but there's a price you pay, and that your spouse and kids pay."
Before you express too much sympathy, look at the numbers. He formed Nexabit in 1996 and sold it last May. For a maximum of three years of work, his personal take is on the order of $450 million. The sacrifice of being away from family may be just as sharp as it was for Willy Loman in "Death of a Salesman," but the rewards of doing so have grown rather considerably.
The Greed Factor
Can anything save Silicon Valley from becoming just as money-obsessed as New York? Portents are everywhere. There's the fellow in Atherton who bought and tore down his neighbor's house so he could put in a nine-hole golf course. There's the 17-year-old San Jose kid who worked for Alteon WebSystems over the summer, forgoing a $10-an-hour salary for stock options. He's now worth $75,000. There's the guy in Woodside trying to sell his '65 Porsche 356c. A sign on the car says he wants "$24,950 or stock options." There's the fact that, for back-to-school night, sixth-graders at Oak Canyon School in Palo Alto didn't pen the usual opus on "What I Did on My Summer Vacation" but wrote sample business plans.
"The greed quotient has ticked upward in the Valley," concedes Paul Saffo, a futurologist who functions as the unofficial local historian. He blames New Yorkers. "We'll be okay if we set up a passport control and don't allow anyone in from Manhattan."
Every day you can see the deals being done at Buck's in Woodside--the venture capitalists cool, the entrepreneurs intense. Considering the wealth of some of the clientele, Buck's isn't a fancy restaurant. The food won't set you back more than $20 a person, and even the wine is modest--a David Bruce Cabernet is $30, a Kendall Jackson $24.
Except for the Mouton Rothschild, vintage 1945. That goes for $2,995 a bottle or $780 a glass.
It's a joke, of course. Jamis MacNiven, Buck's owner, put it on the menu to amuse himself. Buck's has no such bottle. But here's the weird thing. It's been two years now, and no Internet billionaire has ever tried to order the wine. Where you would least expect it, in the very heart of Silicon Valley, restraint is still the order of the day.
ABOUT THIS SERIES
The Dow is up, unemployment's down. Millionaires sprout like dandelions and the rest of us wonder why we're not wealthy, too. The neighbors are spending the bonus on a first mansion. Style is taking occasional looks at this new Gilded Age we live in and how it is changing culture, society and the size of our sport utility vehicles.
CAPTION: EMusic's Gene Hoffman: "Money is wasted on the executives of Silicon Valley."
CAPTION: In the late Dennis Barnhart and his mangled red Ferrari, a cautionary tale for up-and-coming millionaires: If you've got it, don't flaunt it.