Color of money

Fremont VC strives for equitable equity

For the past three decades Opportunity Capital Partners in Fremont has quietly been tearing down financial barriers and recently received top honors from Black Enterprise magazine.

In its annual report, New York-based Black Enterprise magazine recently recognized Opportunity Partners as one of the top 10 private equity firms headed by an African American partner.

“The reason for this list is to give an indicator of a segment of African American business,” says Derek Dingle, executive editor of Black Enterprise.

“Two years ago we decided to expand our listings to include private equity firms because we thought it was important to look at those companies that are actively investing in businesses. Many of the firms that we’ve identified invest in minority-owned businesses,” he says.

Opportunity, which has $135 million under management, is not an average run-of-the-Sand-Hill-Road VC firm.

“Our philosophies share more similarities than differences; we both are in the business of providing capital to entrepreneurs in a fashion that will allow us to realize returns that our partners will find attractive. There is no difference there,” says Peter Thompson, managing partner of Opportunity.

“The primary difference between us and a ‘general’ market fund primarily has to do with the marketplace focus. Our focus is entrepreneurs of color and women,” he says.

Opportunity’s portfolio, which has funded dozens of startups over the past 32 years, is primarily focused on information technology, communications and health care, but includes few household names.

Its current portfolio companies include antispam software maker BrightMail Inc. of San Francisco, biosciences company BioGenex Laboratories Inc. of San Ramon and plastic dog house maker, Dogloo Inc. of San Francisco.

“Most of the companies we finance do not become public market candidates, so for a good portion of the world, those names are never known,” says Thompson. Most of his companies end up being bought.
Not all ethnic minorities have trouble getting funding, as can be seen by the large number of well-funded Bay Area startups headed by Asian and Indian entrepreneurs.

But Susan Hailey, CEO of San Mateo-based Forum for Women Entrepreneurs (FWE), says women and other groups still have a long way to go to achieve equitable equity.

“Our organization was founded in 1993 based on a study that said something like 5 percent or less of venture capital went to women,” Hailey says.

Despite U.S. Census figures that show women own or co-own almost 40 percent of all U.S. businesses and the number of black-owned companies grew by more than 30 percent in the last decade, African American and women-owned startups each were awarded less than 5 percent of all VC money distributed in 2000, according to VentureOne.

“Women entrepreneurs needed to be educated in not only how to ask for money, but what it takes — what a fundable business looks like,” FWE’s Hailey says.

Opportunity’s Thompson says even in today’s more enlightened business climate, women and ethnic minorities still face additional hurdles to get access to capital.

“There are still roadblocks that result from perceptions from those that are in the position to make decisions as to how capital is allocated,” Thompson says.

“On the other hand, I think that increasingly as there are more instances and more evidence of women and people of color ascending to positions of responsibility and authority within corporate America, the reasonable and objective observer will be less inclined to think that there is a distinction to be made on color or gender,” Thompson says.

Opportunity traces its heritage back to 1970 when Richard Nixon was president and promoted “black capitalism”to fight poverty.

Back then two Bay Area companies, Bank of America Corp. and Standard Oil Co. (now ChevronTexaco Corp.) gathered a group of investors to start the Opportunity fund to target black entrepreneurs.

Thompson says he’s been with Opportunity since it opened in 1971.
“At that time there was really no organized source of venture capital for entrepreneurs of color in the Bay Area,” Thompson says.

Recognizing the dearth of women-owned business, Opportunity expanded its focus to include gender parity in funding.

“Talented entrepreneurs come in all colors and genders. It’s just that women and certain ethnic minorities have been under served and overlooked by the general market funds,” he says.

David Sheldon, CFO of BioGenex, says Opportunity is actively involved as an adviser to his company.

“They look at companies for more than one reason. They look for return on investment but they also consider, like their name suggests, the kinds of opportunities that are being generated by the company. For instance this firm was founded by immigrants and it has quite a mix of people from different ethnic backgrounds,” Sheldon says.

But for startups, getting past the initial funding barrier is sometimes the hardest part.

“Anywhere, if you’re not part of the established network, it’s hard to break in — in Silicon Valley it’s really hard to break in,” says the Forum for Women Entrepreneurs’ Hailey.

Black Enterprise says venture firms like Opportunity are more than mere VCs; they are examples to others.

“I think it’s a very important development in terms of giving minority-owned businesses access to equity capital so they can grow and eventually go public when the IPO market turns around,” BE’s Dingle says.

Opportunity’s Thompson agrees.

“I think we validate the fact that it is possible to achieve attractive results from providing financing to entrepreneurs who are people of color or women,” Thompson says.

He says in the three decades he’s been watching the business world, a woman, Carly Fiorina, was named to head Hewlett-Packard Co. of Palo Alto and Richard Parsons, a black man, is now CEO of AOL Time Warner Inc. of New York.

“With AOL or HP, you don’t think that those two people in particular were promoted to those positions because of an affirmative action quota.”
“It was all about money,” he says.

Accidental capitalist

A phone call in the 1960s helped transform the venture capital industry

When Paul Wythes was an engineering student at Princeton University in the 1950s, he had no idea what venture capital was.

Little did he know that a few years later, a fateful telephone call would change his life and make him one of the pioneers of venture capital and Silicon Valley’s startup heritage.

With a stroke of a pen, as co-founder and chief venture capitalist of Palo Alto-based Sutter Hill Ventures, Wythes has controlled the fates of billions of dollars worth of investments over the years. That’s a far cry from a relatively modest childhood growing up in southern New Jersey.

“I studied and did well in high school and it opened up a whole new world to me,” Wythes said.

Wythes radiates a calm confidence, while his solid posture, tall stature and playful spirit hint more at his basketball-playing youthful past than reality: Wythes will celebrate his 70th birthday in June.

Looking into Paul Wythes eyes, you see into a man who loves
learning.

After a land-based tour of duty in the Navy, which he ironically joined thinking he’d see the world, Wythes enrolled at Princeton to study engineering as a scholarship student.

“I liked engineering, but experienced the business world through summer jobs,” Wythes says, explaining why the business world held an allure for a young man who yearned to see new and exotic lands he’d only read about as a child in New Jersey.

“The dean of the engineering school told me to look at a business school on the West Coast called Stanford. I’d never been west of the Mississippi River,” he says.

At 26, Wythes graduated from Stanford University and took a job with Honeywell International Inc. in technical marketing.

“In those days, most graduates were getting jobs at big companies,” says Wythes, contrasting his life to the current trend of Stanford graduates striking out to join startups.

Like many single, fresh Stanford graduates in 1959, Wythes found a roommate and moved to San Francisco, a continent away from his boyhood home, where he met his future wife.

“She’s from Hawaii,” Wythes says, a passing reference proving that at least one southern New Jersey boy could land a mate from an exotic locale. The couple married and moved out of the area as Wythes’ career took him to Southern California.

Then things changed in 1964.

“I got a phone call from Greg Peterson, a Stanford classmate of mine and a co-founder of Sutter Hill,” Wythes says.

Back then, Sutter Hill was in the real estate development business and specialized in shopping centers, giving many of the valley’s suburbs their trademark strip-mall look.

“[Peterson] said, ‘I want you to come up here and start us in the venture capital business.’ At the time, I didn’t know what the venture capital business was about and I’m not sure he did either,” Wythes says.

Using the study skills he honed as a child in New Jersey, Wythes not only learned the definition of venture capital, he helped shape an industry.

“Sutter Hill Ventures has been around since the mid 1960s; it’s been a firm for 40 years,” says Mark Heesen, president of the Washington, D.C.-based National Venture Capital Association.

On May 1, the NVCA awarded Wythes with its lifetime achievement award.

“When you look at the venture capital industry as a whole, most people put the beginnings of VC at the late 1950s, so he’s been at it from the very beginning and is still at it. Paul’s literally one of the people who invented venture capital as we know it today,” Heesen says.

During Wythes tenure, he helped launch such startups as LSI Logic Corp., Nvidia Corp., Palm Inc., Linear Technology Corp., Network Appliance Corp. and Avid Technology Inc.

“Look at the number of companies he’s founded over the last 30 or 40 years. More important is the number of young venture capitalists he’s helped to mentor through this entire period,” Heesen says.

Wythes points out that he knows what it is like to be in the position of getting a startup off the ground, since he had the same experience launching Sutter Hill.

According to those at the receiving end of Sutter Hill’s investing, Wythes never let his powerful position go to his head.

“We ran into a situation at one point when Xidex was essentially going to run out of money and not be able to meet Friday payroll,” say sLester Colbert, former CEO of one-time Sunnyvale startup Xidex Corp.

“My CFO and I went over to Paul and told him we needed to have a check or we weren’t going to meet payroll the next day — it was as simple as that,” Colbert says. “And with no more questions, Paul sat down, wrote the check and gave it to us. We made the payroll and eventually the company made itself into a very substantial success. That’s the kind of support you get from Paul Wythes — the kind that you are deeply grateful for getting.”

Xidex was acquired by Anacomp Inc. of San Diego in 1988.

NVCA says Wythes is leaving his mark on the next generation of venture capitalists.

“As part of the old guard, Paul Wythes is very candid, very open and honest. It’s a breath of fresh air for young people who are searching for how to work within the venture capital environment,” NVCA’s Heesen says. “He’s very well-grounded. He’s seen technologies come and go and understands that technology that’s hot today may not be hot tomorrow.”

Whether the NVCA considers him part of the old guard or not, Wythes says he is as excited about venture capital as ever.

“I told them in New York when I got the award that I wish I was 50 years younger, so I could do it all over again,” Wythes says.

Pent-up demand boosts spending

After years of red ink, technology hardware is showing signs of recovery.

A new report by Emeryville-based information technology researcher Techtel Corp. says server sales improved in the first quarter of 2003, while sales of personal computers are still sluggish.

“The good news is that the IT sector managed to get through a challenging quarter intact,” says Michael Kelly, CEO of Techtel.

According to Techtel’s research index, the first quarter of 2003 showed an 11 percent increase in spending on servers and other high-end IT hardware for the first time since the end of 2001.

Techtel’s numbers for desktop personal computers are not as encouraging, showing a 9 percent fall in sales from last year.

“After 9/11, we saw a shift to low-end categories as companies moved IT spending to low-risk … categories such as PCs and notebooks. This is the first quarter [since then] where the more expensive stuff is being purchased,” Kelly says. “While this does not yet establish a trend, it does suggest that underlying economic improvements are beginning to shore up IT investment.”

The Techtel report is at odds with a recent Goldman Sachs survey of the 100 largest IT buyers worldwide, which suggests IT spending should fall 3.2 percent in 2003.

New York-based Goldman analyst Rick Sherlund says the recent projection is a drop from a February report, which predicted IT spending growth of 1 percent this year.

He says most large IT buyers have given up on an economic recovery for the second half of 2003.

Techtel agrees that IT spending at larger companies will remain under pressure, saying much of the growth is coming from smaller companies with fewer than 250 employees, where 25 percent say they plan to increase IT spending this year because of pent-up demand.

Warren Mootrey, a director of marketing at Santa Clara-based Sun Microsystems Inc., the No. 4 server maker worldwide, says the trend goes beyond just small business.

Instead of buying big box servers with multiple functions, companies are leaning towards horizontal clusters of servers, which are smaller and cheaper.

“IT spending is picking up not so much with smaller company demand, but with horizontal computing in general. A lot of companies view it as buying lower-cost [server] boxes,” Mootrey says.

He says companies are basically looking to get more bang for their bucks.

San Francisco-based antispam startup Brightmail Inc., which employs slightly more than 100 workers, agrees things have changed.

“Three years ago what you saw were negative inventory levels from the hardware makers so, as a result, we had to pay list price or sometimes a premium for hardware in order to secure the products we needed,” says Brightmail CFO Mike Irwin.

But the dot-com bust and a number of high-tech bankruptcies change the hardware climate.

“That hardware shortage turned into the current glut and now you have a lot of second-hand equipment on the market so prices have dropped significantly,” Irwin says.

Brightmail also avoids another practice common to the dot-com boom — signing an exclusive contract with a hardware provider.

“We maintain relationships with multiple vendors. That way we can keep everyone honest,” Irwin says.

Companies also are making fewer speculative purchases.

“We so overbought our hardware in 1999 and 2000 and ended up with way more than we needed,” says Manjal Shah, CEO of online auction software seller Andale Inc. of Mountain View which employs 140 workers.

“For the past few years, we’ve been able to hold our breath, so to speak, in terms of buying more hardware. But especially in the past six months, we’ve really used up all of that extra capacity and then some and finally now have started a really aggressive buying program to replace a lot of the old equipment.”

Peripherals are also needing to be replaced. A Hewlett-Packard Co. spokesman noted that the Palo Alto hardware maker continues to see strong sales of printers.

But PC sales are another story. Andale agrees with Techtel’s assessment of PC sales.

“We’ve found very little pressure to upgrade the desktop PCs and the reason being, most of our employees, even the engineers, just use their PCs to log in to the central server anyway,” Shah says.

He says replacing the older IT hardware, which was wearing out from age and use, brought some unexpected benefits.

“What we could have bought for $10 million four years ago, we can now upgrade that with newer systems that have more capacity and that are faster for like 2 to 3 million dollars or less. We can grow the business at a lower cost,” he says.

Techtel’s Kelly says in the current IT market, buyers are much more savvy.

“The sins of the past — ‘solutions’ that didn’t solve the problem, investments that never paid off and promises never fulfilled — are extensive and remain unresolved for large areas of the sector. The IT industry will need to regain trust and deliver real solutions,” he says.

Reg FD crusader sells investor info company

Mark Coker’s BestCalls.com used the Internet to provide investors with up-to-the minute information on companies

Mark Coker’s personal crusade as an individual investor helped change the way American companies do business.

That’s not a claim most 37-year-olds make.

Two weeks ago, Coker sold his profitable BestCalls.com investor information Web site to Shareholder.com of Maynard, Mass., for an undisclosed price.

Shareholder.com says it plans to keep three full-time BestCalls.com workers in Los Gatos for the foreseeable future.

Coker plans to stay on in an advisory role with Shareholder.com, but will focus on developing his other business, Dovetail Public Relations of Los Gatos.

Back in the late 1990s, Coker, who had been following the stock market since he was a teenager, became fascinated with quarterly conference calls with analysts.

As an investor in a handful of companies, Coker wanted to listen in on those calls and hear what his companies were telling
analysts.

After Legatos Systems Inc. of Mountain View refused him access to its quarterly calls, Coker sold the stock he owned in that company and used the proceeds, slightly more than $100,000, to start BestCalls.com.

“What we’re talking about — disclosure — is all about communication; it’s companies increasing communication and the level of transparency with their investors,” Coker says.

About that time in 1998, BestCalls.com started its partnership with Shareholder.com, the company that would one day become its owner.

“I heard about BestCalls and the campaign Mark was on to open up conference calls,” Ron Gruner, president and founder of Shareholder.com says. “We began to do more things together, using BestCalls information and sharing our strategies.”

While angering some companies hell-bent on keeping their conference calls private in 1998 and 1999, Coker’s BestCalls.com started getting attention in such national news media as Time, Businessweek and the New York Times.

It wasn’t just the press that was paying attention to BestCalls. Former U.S. Securities and Exchange Commission (SEC) chairwoman Laura Unger, who was a commissioner at the time, also contacted Coker.

“People really flocked to us for ideas on how to manage the move towards greater corporate transparency,” Coker says. “I remember having a conversation with Laura Unger in 1999. She had never attended an earnings conference call before and I remember her asking me, ‘Do companies release information on these calls that they don’t release through other methods?’ I told her definitely. That’s what it’s all about — they were selectively disclosing material information.”

Although Unger balked at new federal regulation, she finally buckled and supported Regulation FD, which requires full disclosure from public companies about information that could affect stock price.

During the public comment period for the regulation, the SEC says almost 6,000 public comments were filed with its office.

“The vast majority of these commenters consisted of individual investors, who urged — almost uniformly — that we adopt Regulation FD,” states the SEC Web site.

BestCalls.com’s Coker says regulation FD, which took effect on October 23, 2000, changed everything and companies that once were reluctant to provide conference call access were willing partners with his company.

“Once that happened, the writing was on the walls for companies to become transparent,” he says.

Comcast takes on TiVo with new DVR

A move by the nation’s largest cable television company could be bad news for San Jose-based TiVo Inc., which dreams of continuing its domination of the digital video recorder (DVR) market.

Comcast Corp. of Philadelphia, the cable TV company that serves most of the Bay Area, plans to start testing a TiVo-like service this summer based on the technology of TiVo rival Ucentric Systems Inc. of Maynard, Mass.

TiVo stock (Nasdaq:TIVO) fell 5 percent to $6.66 a share May 13, the first trading day after Comcast’s DVR plans went public.

TiVo, which did not return telephone calls, recently unveiled two new business lines: a TiVo-lite service to be bundled with some Toshiba DVD players, and a home networking upgrade that requires multiple TiVos and wiring for broadband Internet access in each room with a TV.

Comcast says its Ucentric service will record 60 hours of programming, compared with 20 to 40 hours for most TiVos. Along with traditional DVR abilities of pausing and rewinding live TV, the Ucentric DVR will allow cable customers to record a program on one digital cable channel while watching a different channel — an option not available to VCR or TiVo owners.

The Comcast-Ucentric system also allows automatic home networking over existing coaxial TV cables, with no need for additional broadband Internet wiring. This will allow shows recording in one room of the house to be viewed in other rooms.

“If your kids are watching TV in the living room and you want to watch a ballgame, you can send their show to their bedroom. If you’re watching the game and it’s time for dinner, you can hit pause … then resume the show from your bedroom,” says Michael Collette, CEO of Ucentric.

Comcast is test marketing the Ucentric system in Philadelphia this summer, but has no immediate plans to roll it out nationwide.

Analyst Jeff Groverman of Pacific Crest Securities, which makes a market in TiVo stock, remains bullish on TiVo because of its almost cult-like status.

“96 percent of TiVo users say they would recommend TiVo to friends or family. TiVo could have the highest satisfaction ratings of any consumer electronics product,” he says.

LambdaMOO finds new pasture

The U.S. Department of Defense has a bunch of Dungeons & Dragons-playing computer geeks to thank for its collaborative computing system.

According to PlaceWare Inc.’s Web site, the company was started in 1990 by a group of engineers from Xerox PARC who developed technology to play a primitive form of interactive D&D over the Internet called multi-user dungeon.

The underlying game technology, called LambdaMOO, was used by the U.S. armed forces to create interactive computing and by PlaceWare to develop its current Web conferencing products.

As a nod to its heritage, PlaceWare continued to host LambdaMOO for current Web users at its Mountain View headquarters. But now that Redmond, Wash.-based Microsoft Corp. owns PlaceWare, LamdbaMOO is packing up and will be run out of a volunteer’s home.

“LambdaMOO is moving into private hands for the first time,” says Pavel Curtis, a founder of Mountain View-based PlaceWare Inc. and keeper of the LamdaMOO source code.

Curtis says LambdaMOO has been running off antiquated spare parts for more than a decade and actually will be on better equipment running off its new home-networked DSL server.

PlaceWare positioning key to Microsoft deal

In the startup mergers-and-acquisitions market, sometimes a fierce independent streak is the easiest way to attract a mate.

When Redmond Wash.-based Microsoft Corp. wrapped its $200 million cash buyout of PlaceWare Inc. of Mountain View last week, company management and board of directors say they worked for years to be a stand-alone company; a position that ultimately attracted the world’s largest software maker.

Microsoft says it plans to use PlaceWare as its entry into the Web conference market and many analysts predict PlaceWare technology will be incorporated into Microsoft’s Office suite of business software.

“The Microsoft stuff happened pretty fast within the last six months,” says Rory O’Driscoll, PlaceWare board member and managing director of BA Venture Partners in Foster City. “But it’s the positioning — not so much positioning PlaceWare to exit, but positioning the company so it was running well enough so we had options. That’s the most important part.”

Part of that positioning involved replacing key staff, including CEO B.J. Folsom who departed a year ago. He was replaced by George Garrick, who barely had time to get his feet wet at PlaceWare before Microsoft started courting the company.

“B.J. Folsom came into PlaceWare relatively early, was a super guy and did a great job of identifying the business model and got the thing out on the right track,” BA’s O’Driscoll says. “But when we started scaling into a larger company, it made sense to bring in someone who had that experience who probably wouldn’t have been a good startup guy,” he says.

Folsom agrees that PlaceWare grew beyond his skills and main management interest. Although he still is on PlaceWare’s board of directors, he left the company and joined San Francisco-based Internet media startup Laszlo Systems Inc. in December.

“I’m a serial entrepreneur. I like to be involved in companies that are developing a new category or a new segment that ultimately will become ubiquitous,” Folsom says.

“You can put your mark on the creation. You not only helped make it happen — you influenced it,” he says.

Folsom has a long track record of innovation. He was involved with the first desktop PCs in the 1980s, launching the Rainbow personal computer. Before joining PlaceWare in 1998, Folsom also helped develop Sun Microsystems Inc.’s networking strategy and helped move Exodus Communications Inc. (now owned by Cable & Wireless plc) to focus on the Internet data center market.

One of Folsom’s hardest challenges when he started at PlaceWare in 1998 was helping the company, … which was split between two focal points: Web conference software tools and a conference product, to focus on its business model.

“I put a process in place saying a startup had to focus on one or the other, but could not have two agendas,” Folsom says.

In 1999 Folsom convinced PlaceWare’s founders that software services was a viable market for the company.

That focus helped PlaceWare to become the No. 2 Web conferencing firm next to WebEx Communications Inc. of San Jose.

“So what did we have to do to attract Microsoft? What we didn’t have to do is spend all our time trying to get them to buy us,” BA’s O’Driscoll says.

“What we had to do is prove the category mattered. Microsoft decided to enter the space once it reached critical mass,” he says.

The journey to Microsoft ownership changed PlaceWare.

“In many ways, PlaceWare has changed dramatically over the years as you could expect for a company that started with half a dozen people,” Pavel Curtis, a PlaceWare founder-turned-Microsoft employee who is still with the company says.

“Last week I couldn’t spell Microsoft,” Curtis jokes. “Now I am one.”

Sarbanes-Oxley Act impacting startups, too

New laws are like new drugs, it’s the unintended side effects that can hurt you.

In the wake of the dot-com bust and accounting scandals of 2000 and 2001, the federal government stepped in with a new law, the Sarbanes-Oxley Act of 2002, to protect investors.

But some entrepreneurs are saying the new laws are too broad and are affecting private companies, which they weren’t meant to regulate.

“Part of it’s tangential in a sense unrelated to the new laws’ purpose,” say Ken Fromm, a San Francisco-based entrepreneur.

Fromm now works as director of business services for enterprise software startup Modulant Inc. of Charleston, S.C.

He says an unintended side effect of Sarbanes-Oxley is hurting some startups.

“Any company that we’re looking at to get funding from, any companies that we want to get acquired by and any companies that we want to be in a partnership with have additional measures they have to go through in order to do business with us,” he says.

Fromm says this can be twice as hard for private startup companies dependent upon venture capital from larger public companies.

In the past, a public company that wanted to form a strategic partnership with a private startup to develop a new technology had an option to form a limited partnership called a “special purpose entity.”

That allowed a technology-sensitive company to invest money in possible breakthrough products without alerting its competition by disclosing the investment expenses in its quarterly or annual reports.

Making matters confusing, the U.S. Securities and Exchange Commission, the federal agency in charge of enforcing Sarbanes-Oxley, has no simple mathematic litmus test to determine when one of these “off-balance sheet” investments by a public company should be reported.

The SEC says off-balance sheet investments that “have or are reasonably likely to have” a current or future effect on the public company’s financial performance, should be claimed on earnings reports.

That can hurt a startup that may have trade secrets or emerging technologies that would be endangered by public disclosure.

“We’re looking at additional funding from a company and with this ‘special entities’ provision in the new laws Å  they may have to include us on their books — which is not something either of us wants,” Fromm says.

This is a direct result of the Sarbanes-Oxley Act as well as other federal accounting regulations of public companies.

Startups that already are facing a squeeze in VC funding are facing more red tape in corporate partner financing, Fromm says.

But, one prominent Cupertino software company, known for investing in startups, says so far it’s been unfazed by the new laws.

“I spoke with some of our finance team about this and I do know that we have not yet been impacted by Sarbanes-Oxley,” says Genevieve Haldeman, a spokeswoman for Symantec Corp. “But that doesn’t necessarily mean that we won’t be.”.

Market watchers have been warning of this danger for months.

Shortly after Sarbanes-Oxley became law eight months ago, Burlingame-based Forbes magazine publisher Rich Karlgaard wrote a column ruminating that well-meaning lawmakers may be killing viable companies before they leave the womb of their incubators.

“The dilemma for public policy makers is that most entrepreneurs do fail,” Karlgaard wrote, explaining that in these cases market conditions are more likely than misconduct to kill a startup.

Karlgaard also argued management at startups could be pressured by legal advisers to tone down the cocky entrepreneurial spirit out of fear of possible lawsuits if the company ever goes public or gets acquired by a public company.

“That would be a travesty,” he wrote. “Entrepreneurs are neither saints nor sober-minded.”

Fromm says the new regulations are expanding beyond their legislative boundaries.

“You’ve got these regulatory issues written for public companies spilling over into private startups,” he says.

Magazine icon predicts dot-com resurgence

Red Herring co-founder Tony Perkins still has the fever for the Internet and journalism

Tony Perkins has been at the forefront of Silicon Valley’s technology industry for the past 15 years. Through his work at Silicon Valley Bank and as a co-founder of the now-defunct Red Herring magazine, Perkins has consistently ridden the crest of each technology wave that washed across the valley.

His current project is a dot-com startup he funded with $50,000 of his own money. Called AlwaysOn LLC, it is a Web-based hybrid of business reporting and online journals popularly called “blogs” that he predicts will turn traditional media on its ear.

Biz Ink reporter David Speakman recently spoke with Perkins at Buck’s Restaurant in Woodside about AlwaysOn, which he eagerly showed off from his wirelessly Apple PowerBook. Perkins also talked about the health and entrepreneurial spirit of Silicon Valley.

You’ve said before that the success of eBay Inc. inspired you to attempt to apply its model to media on the Internet to create AlwaysOn.

It’s really built upon two trends. One is a Web media trend, the other is a business trend. A couple of observations in the reality of the market really inspired me to get this thing going. From a Web consumer standpoint, the clear winner in the first chapter of the Internet was eBay.

What eBay did was create an arena and invite its customers to come play in that arena. But if you think about it, all the things that go on in the arena that are of value to the customer are produced by the customers themselves.

But how can you apply that model to news media?

I think that is an incredible business strategy. I think that quality is the ultimate unique quality of the Internet. In the first generation of the Internet, all of the media companies really viewed the Web as an additional way to broadcast something. What AlwaysOn is about is creating a two-way relationship. An overwhelming amount of our content is generated by responses from our users. It can be described as the “ebay-ization” of media.

What does that mean?

eBay is the first example of the second-generation media company. Whether it was lucky or however you describe it, eBay created a business model where, again, most of the content they offer customers is customer-generated.

I think all the rules and the ideas concerning media and journalism are going to be incredibly challenged. I don’t even know what media is anymore. When you go to the AlwaysOn site, about 70 percent of our content is created by our members.

Would you call the invention of weblogs, or blogging, a disruptive technology in the media landscape?

Open-source media is probably the best way to describe it. Today most media companies control 100 percent of their content; even the letters to the editor that they edit before they publish. Traditional media is hesitant in participating in audience-generated concepts. They are worried about losing control of their content.

I think the Internet and blogging software is going to blow all the rules of journalism apart and we’ll have to put them all back together and see what happens.

Isn’t that already happening? Your traditional magazine, Red Herring, is out of business.

There is a cycle. Personally, I get great enjoyment out of doing things that are new and cool and this is the most fun I’ve had.

How will interactive journalism and blogging affect traditional media giants?

I think they are going to have to give up editorial control, as radical as it sounds, and allow their viewers and subscribers to participate in it. No offense to our profession as journalists, but I think the established media companies will have to decide whether they want to tap into the collective intelligence of their customer and subscriber bases to become a facilitator and aggregator for the rest of their subscribers’ ideas or whether they are going to continue to take a puritanical view and say “this material must pass through the editorial screen, and we completely edit and control it.”

Dot-com content companies have a bad reputation. How will AlwaysOn succeed?

AlwaysOn is already profitable. We already have many sponsors through advertising. A lot of our content is free to us and the cost of maintaining and operating the site has gone down dramatically. I spent $150 on software licenses and operate the site for $400 a month. And it’s scalable. The fact that I can run a virtual company and have a copy editor in the Netherlands and another copy editor out in Sacramento and we can all just operate wherever we are and can produce this Web site means that I’m not spending on office space or an information technology department.

You’re a native of Silicon Valley and have had a career that has taken you through some steep highs and deep lows. What’s your take on the current state of the region?

I expect this is going to be one of the most interesting times ever. I’m finding today more interesting things than I’ve ever found in my career. I’ve always been fascinated by the entrepreneurial process here. I take pride in exporting entrepreneurial capitalism around the world. I think that innovation means good margins and good margins raise the standard of living. I think that for an entrepreneurial capitalist one plus one can equal three; so everybody can win.

I’m very proud of the fact that people come from all over the world to start companies here. As you know, a third of the companies founded in Silicon Valley are founded by either Chinese or Indian immigrants. I think that’s cool. I think the global Silicon Valley is the American dream.

Cisco counts on new products to spur growth

Networking giant unveils line of Wi-Fi phones, plans to release other products in coming months

After weathering the brunt of the information technology (IT) spending downturn, the largest telecom networking hardware maker is lashing back with a slew of new products set to be unveiled over the next couple of months.

At the NetWorld/Interop tradeshow in Las Vegas April 28, San Jose-based Cisco Systems Inc. (Nasdaq: CSCO) unveiled a new line of wireless, voice over Internet protocol (VoIP) telephones using the 802.11b Wi-Fi wireless standard.

Cisco stock, which is trading at 26 times earnings, rallied slightly and closed April 29 up more than 1 percent at $15.14 a share.

Cisco predicts cost savings for companies, as its new Wi-Fi phones could replace pagers, cell phones and walkie-talkies currently used in health care, maintenance and warehousing industries, where workers are rarely at assigned desks.

Cisco thinks hands-on products are a key to its future growth.

“Investments that increase the productivity of end users have a more compelling return on investment than investments that only focus on IT support costs,” says Don Proctor, Cisco’s vice president and general manager of its voice technology group. “If an enterprise makes an investment that increases the productivity of 5,000 end users by only 2 percent, that is like adding 100 more people to your staff.”

But at least one analyst isn’t buying the hype.

“Despite the press releases and chest thumping Å  when all is said and done, we see this as more of a marketing event than a driver of sales in 2003,” says Raj Srikanth, a New York-based analyst with Deutsche Bank. “We do not think the
wave of new products that is just beginning to be unleashed in the space is likely to have any meaningful impact on market share and the financial performance of companies in the current IT spending environment.”

Cisco holds more than a 65 percent share of the data networking market, 76 percent of the Layer 2 Ethernet market (the most-common technology used for corporate local area networks) and 73 percent of its network switching cousin, Layer 3, which is used by internetwork packet exchange (IPX) and AppleTalk internetworking protocols, according to Redwood City-based Dell’Oro Group research.

Its competitors, such as 3Com Corp. of Santa Clara, Foundry Networks Inc. of San Jose, Extreme Networks Inc. of Santa Clara and Juniper Networks Inc. of Sunnyvale, carve up the rest of those markets.

“We believe Cisco’s dominance of the networking space will remain unchallenged in 2003 to 2004 and expect to see some minor shifts in market shares of other players,” say Deutsche Bank’s Srikanth, who predicts consolidation in the sector.

Deutsche Bank has a significant banking relationship with Cisco and many of its networking competitors.

Cisco, which closed its fiscal third quarter April 26, is in a U.S. Securities and Exchange Commission-mandated quiet period and is unable to comment on issues that may affect its stock price until after it releases quarterly earnings May 6.

“We look to the networking giant to post revenue of $4.555 billion, which represents a sequential decline of 3 percent,” Mark Sue, a New York-based analyst with C.E. Unterberg, Towbin wrote in a research report.

“In our opinion, overall networking equipment demand is likely to remain muted
during this constrained IT spending environment,” he says. “Cisco may be particularly impacted due to its large size.”