IS SOFTWARE THE NEW ROCK & ROLL? 

Ten years ago if you were twenty something American without any particular sporting talent who wanted to earn more money than you could ever use, you had two options. First, put on a suit and head off to Wall Street; second, grow your hair and set up your own rock band.

Since then the idea of Wall Street has become just so utterly 1980s that the thought of working there is enough to make many college students nauseous. Unfortunately since then though the US music industry has become obsessed with either bad-ass rappers or squeaky clean pre-teens like Hanson. The result has been something of a crisis for budding billionaires.

Fortunately a new route to prosperity has emerged. You don’t need to wear a suit (in fact, you should never wear one), and you don’t have to play an instrument (although keeping one in your office is more than acceptable). You do, however, have to know your way around a computer, because the best way to become a multi-millionaire at the moment is to head to Silicon Valley in California and start up a software company.

Every week, what was once just someone’s bright idea goes public or gets sold and makes the founders multi-millionaires. Amazon the leading e-commerce web site which first went public in 1997 was valued at more than $25 billion at its peak, at the time its founder Jeff Bezos was worth more than $12 billion. Yahoo! confounded the April Fools when it confirmed on 1st April that it was acquiring Broadcast.com for US$ 6 billion in a all-stock deal. The truly frightening thing is that none of these companies existed five years ago.

The remarkable thing is that to those on the inside, and for all the growth we have already seen, the market has plenty of boom left in it yet. John Doerr is perhaps the most important financier in the valley. He joined the Venture Capital company Kleiner Perkins Caufield & Byers in 1980, at the end of last year their portfolio of technical companies employed 162,000 and had a market value of $135 billion. When he speaks, people listen, and when he spoke to students at Stanford University last year he said: “I think it is possible that the internet has been under-hyped. It’s like Big Bang - it’s like a creation of a whole new

Is software the new universe. It’s going to go on a long, long time. And it’s going to affect every part of society.”

Doerr made his name more than a decade ago backing such technology superstars as Sun Microsystems and Compaq Computer. These days, he is squarely focused on e-commerce within the Internet, believing that this simply cannot be over-hyped. Already he has struck gold with investments in Net hotshots Netscape Communications, Amazon.com, and At Home Networks, but believes that this is just the start of it.

“The Kleiner team is helping to back entrepreneurs in 20 to 30 projects a year,” he says,” and I’d say right now, more than a third, maybe as many as half of them, are related to electronic commerce on the Internet in one form or another.

And the great thing is that it seems to me that the next three years are going to be even more exciting than the recent past. I think three years out, the Net will be very, very different than the Net we know today. It will be what I like to call an Evernet. It’ll be always on, it’ll be on all kinds of devices, not just on PCs. It’ll be on set-top computers, and it’ll be on tables in kitchens, and God hope, in all the classrooms.

And it’ll be wireless everywhere. Lots and lots of Net everywhere, pervasive Net, Evernet, always on. And it will be a very high-bandwidth Net. And everybody wants a piece of that.”

This is a message that is echoed by the founder of garage.com, a company ironically that is updating the world of venture capital to the demands of the
e-generation, in much the same revolutionary way as Amazon.com shaped a wired generation’s book and record buying habits.

A typical venture capital firm raises money from external sources and then the VC invests these funds in various investment opportunities. At garage.com, the system is very different. At the company’s gorgeous Queen Anne style residence in Northern California the company operates a series of crucial introductions. It alerts its Member Investors-a select group which include most of the important new media players from Microsoft right the way down to first time internet investors- to investment opportunities from within its portfolio of member companies. These in turn find garage by sharing business plans and information within its specially protected site on the web.

Garage’s member companies then make an independent investment decision and each chooses the investors with whom he or she wants to partner. The funds flow directly from the investor to the company. Member Investors and Member Companies negotiate the company’s valuation, equity investment, and operational participation. Garage.com doesn’t involve itself in this negotiation process at all, but instead acts as a sort of on-line, impeccably researched, funded and equipped dating agency. Its job is simply to identify the likeliest new internet ideas and then to pair them with the readiest sources of finance.

“E-commerce and Internet tools are the hottest thing on the net right now,” reports garage.com founder and Silicon Valley legend-in-the making Guy Kawasaki.

“Anything that makes the Web work better for customers are received pretty favorably by investors right now”.

“However, simply “getting eyeballs” doesn’t work anymore. There are very few content plays that are attracting attention. I think we are now starting to realize that the simple fact that many people are visiting a site doesn’t mean that the company’s revenue model will work.

But then e-commerce isn’t just about talking to a mass market. Companies that are marketing to businesses seem to be taking off right now. The easy and obvious path of business to consumer is getting crowded. Now companies are starting that are offering real solutions to other companies as opposed to “cool sites, and that is something we are keen to encourage.”

Support for both men’s upbeat prognosis on internet investment duly arrived this year with the publication of the definitive guide to venture capital investment in the Valley from the management consultancy giants PriceWaterhouseCoopers.

They announced 1998 to be the strongest ever year for venture capital investment as a whole a record total of $14.3 billion was invested across the U.S. And once again by far the largest piece of this golden pie went to Silicon Valley. Of the $10.8 billion invested in high-tech companies, $4.5 billion was ploughed into Silicon Valley start-ups. To envisage the full scope of this growth curve here, consider that five years ago, the total pot of venture capital being spilled in Silicon Valley was barely $1 billion.

It’s hard to pin down exactly when this frenzy kicked off, but one day, almost five years ago now, is particularly important: April 24, 1995. On that day Netscape, the company that created the software that lets us see what’s on the world wide web, went public. Over night, Mark Andreessen, the company’s founder, a programmer in his early 20s who looked as though he had only recently started shaving, was worth hundreds of millions of dollars.

To anyone who had thought the internet was just a play thing, Netscape’s success was a rude awakening. The net was big business, and more importantly, it was only going to get bigger. Suddenly everyone wanted to be the next Andreessen, and every venture capital company in the country wanted a share of the next Netscape. What makes this latest boom in the valley so is the underlying economics.

In the last boom in Silicon Valley during the 70s, they designed things that had to be manufactured, such as microchips. If they designed a new chip, they needed a new factory. Eventually the US lost out to the Far East because the manufacturing costs were much cheaper. With software, however, none of these problems apply. You come up with the idea, you create it with the hand of some dazzling programmers, and then you let people download or access it over the internet. You want to improve it? You just let people download an update. There are no production costs, no packaging, no shipping. Instead the mantra is Build it - and if it’s good enough, they will come.

Po Bronson is the author of “The first $20 million is the hardest, a Silicon Valley novel” a novel about a start up with the idea of selling a $500 computer. His description of the valley in January’s edition of the San Francisco based technoculture bible Wired neatly sums up just how frenzied the software market has become:

“Programmers are represented by agents, and manual writers have three-book backlogs there are so many software firms that just selling them software can make you one of the fastest-growing software firms...the reason is that hightech companies are quick-on-the-uptake with anything that makes them more efficient, which they’d better be, because this market is scary-competitive.”

This is why there is negative employment in the Valley. It’s why head-hunters advertise jobs for programmers on the billboards that line the freeway through the valley. It is why every programmer who wants a job can get one - although for many of them, a job is not enough, no matter how good the salary. After reading endless tales of 20 and 30-somethings who have already made their fortune, they want to run their own show, or at the very least be in early at a start up, with equity or options that will make them a millionaire one day in the not too distant future.

It’s why the venture capital firms are chasing the industry harder and faster than any other part of American fiscal life. You find most of the VCs on Sand Hill Road in Menlo Park, just east of Interstate 280. There are some 40 companies there, it is nicknamed Venture Corridor and given the concentration, you can safely presume that more money goes to America’s entrepreneurs from this street than from any other.

They all lunch in the same place as well: Buck’s in Woodhouse with its massive painting of Hollywood hero Roy Rogers being filmed on a bucking stallion. It’s here that the Netscape team secured the deal that would become the most significant competitor Microsoft had faced in a decade, and dozens of similar deals have been struck over the last year.

Of course, if you’re going to dine at Bucks you want to make a good impression, you’ve got to make sure you don’t look flummoxed by the fact that you have two forks to chose from - not easy for a programmer who has spent the last few years living on a diet of Cheetos and Coke.

Hence one of the many start-ups that feeds off the start ups, The Workshoppe, where English exile and former model Lyndy Janes teaches etiquette to those whose table manners aren’t all they could be. They offer course at a price of around $150 for a dinner lesson and if that’s too much, you can simply buy their video - a snip at $29.95. Little wonder that they have been nicknamed “The Armani of Etiquette”.

On the day we first visited Buck’s eighteen months ago, Rakesh Mathur, the founder of Junglee, was there. Not because he needed Etiquette training, but because at that time he needed more cash. So he sat there locked in intense conversation with his backers trying to sort out his next wave of finance. His story over the eighteen months since then mirrors that of the Valley as a whole.

Junglee was one of those start ups that was already then clearly so hot, it was practically sizzling. They created software that searches a collection of databases on the net, sucks out their content and creates a database of its own. For example, it can go round all the music shops on the net, and automatically tell you which is offering the cheapest deal on the latest Beastie Boys album. Why bother looking at half a dozen job sites to see what’s on offer, when you can go to a Jungleepowered sites that will already have taken all the jobs out of those sites for you.

Eighteen months later it is clear that Rakesh now has rather different priorities. The company he helped found in June 1996 was sold to Amazon.com, the internet’s largest retailer in August last year in an undisclosed share and cash deal that he now coyly confirms was worth “hundreds of millions” of dollars. He also reminds me that the virtual database technology that his company offers-the key to his own multi-million dollar fortune- was simply an extension of the doctoral work he and fellow founder Ram Shriram had produced at Stanford. But the sale of the company does not mark the end of their personal ambitions. All of the founders have pocketed their Amazon.com shares and stayed on with the company after the disposal. And if anything they are enjoying the fact that the next bout of refinancing is no longer the main claim on their attention.

“Basically the deal was a significant opportunity for all of us at Junglee to extend our technology well beyond our current base,” chips in Ram Trireme, the President and COO of Junglee. “The fact is that with Amazon.com, we can address the larger challenges of e-commerce sooner‹and on a broader scale‹than we could have alone, and that is still a great entrepreneurial challenge. Eighteen months ago finding the right backers was becoming the all important thing. Now we are applying all our energies to making our technology work commercially.”

But then not everything has gone wonderfully in the last four years even in Silicon Valley. Even the new media behemoths like Amazon.com and Netscape don’t actually yet make any profits whatsoever, but the hunger for growth and development is still there. Thanks to companies such as Junglee which bring the sort of ideas that can transform industries to the table, money is still flooding in to the Valley, eager to identify and fund the next big thing.

Take Spinner.com, which started life out as TheDJ.com - a great idea that is just waiting to happen. You know all the things you hate about radio? You can’t find just the music you want when you want it, the DJs and ads keep interrupting, you never know what the name of that song you hear is...well Spinner.com does away with that.

Using the Spinner player, you can access any one of 100 different stations at any time through your computer, playing exactly the type of music you like. You like Blues? Fine...will that be Chicago Blues, Delta Blues, Male Blues or Female Blues? What ever you like from Country to Techno, it’s there.

And the real trick is that you can see the name of the track at any time...and then, thanks to a new deal with, who else, Amazon.com, you can order it straight away. Spinner.com was, like most Valley start ups, a stroke of genius from some gifted young programmers, David Samuel and Steve Elvis (although, they were from the Boston based MIT, rather than Stanford, which is the Valley’s true billionaire’s breeding ground - see below),

Within six months of them starting up, they were deemed ‘hot’. They were written about in Billboard, the LA Times and Rolling Stone. Before they had made a penny in revenue, software companies lined up to buy them. They resisted, and instead, pumped themselves up with venture capital waiting for the big hit. They have completed three rounds of Venture Capital. The service sends out some 100,000 songs on 100 channels. Their site is visited by 400,000 people a month, who stay on for an average of 2 hours at a time (the average time spent on a Webster is about 30 seconds). They recently announced a major round of financing, $12 million, from top notch partners, including Sony, Intel and Amerindo Investment Advisors, Inc. (a leading institutional investment firm focused on late-stage Internet companies).

There are now 20 people working there. Marketing director, Scott Epstein is now on his second valley start up. After a career in traditional marketing, he joined Excite, another internet search engine that went from six guys in a garage to a market capital of $2.5 billion in about the time it took for most major corporations to manage to sort out their e-mail systems.

Epstein, at 40, is slightly older than your average start-up fiend. Not only that, but he is a father, which means that unlike most of those he works with, he cannot dedicate every hour of the day to either working or sleeping. Instead, six days a week, he works from 9am to 7pm, then goes home for a couple of hours to see his family then heads back to the office until midnight.

“My life is very compartmentalized,” he explains, “Not a moment is unaccounted for. The two most important things are making sure my kids don’t grow up wondering where their Dad was, and making sure my company gets big and successful as quickly as possible.”

By valley standards, Epstein’s life is pretty well balanced. The two hours every day with his family are two hours of work that someone a few years younger dare not miss lest it lose them a fortune.

Jay Capela is the film maker from San Francisco responsible for Wild at Start - High Technology Adventures and The American Dream, a three part miniseries based on start-ups that premiered last Autumn. Capela has experience of start-ups, he worked at one that was sold to the software company Adobe, and knows all too well what drives them. “You’ve got a team together working night and day toward a common goal,” he says “so you have this intense camaraderie that gets you through. At the same time, there are a lot of disconnects among people, a lot of disagreements, but they are overlooked because of the focus on some milestone - a specific demos stage or VC presentation or product release, whatever - and because of all the energy. It makes you high.”

“It is incredibly energising,” says 27 year old, Venkat Krishnamurthy, the technical brains behind another of the Valley’s hottest start ups, Paraform. “You start out saying you want to be balanced and keep it under control, but it is very challenging and it is exciting, and before you know it, you’re out rollerblading with some friends but you’re not even thinking to what they’re saying, you’re just thinking about the latest idea you’ve had. It invades every part of your life.”

But for Krishnamurthy this could all be more than worth it. He arrived in the valley three years ago from India to do his PhD in Computer Science at Stanford (simply getting on that course is an achievement in itself). While there, he started to play around with a machine left by a previous student called the Cyberware Scanner that was able to scan three dimensional images into the computer - he developed it and took it too a new level. While he was doing this, he showed a few people on the net what he was doing and he got a few calls expressing interest in what he was up to. Then he met up with a sculptor Domi Piturro who provided creative input, and finally they teamed up with Brian Kissel, a 38 year old graduate of Stanford Business School. Last Summer Paraform was born their motto: “Bringing Physical Objects into the Digital World”

They spent time in the NASA Incubator in San Jose, a highly exclusive, partly government funded institution designed to encourage entrepreneurship in the Valley. They were helped with office management and allowed to get on with the serious business of developing their product and securing their finance.

The practical benefits of being in the incubator, however, are only part of the story. More important is that start ups in an incubator are the chosen ones. They are the first port of call for any VC company. Among the backers they acquired was Paul Allen, who co-founded Microsoft with Bill Gates. He flew them up to Seattle in his private jet to meet him - “quite an exhilarating experience” according to Krishnamurthy with a hint of understatement. “One minute you’re used to being a graduate, the next you’re standing in a private hangar playing pool on a private table and you’re being flown off to meet one of the richest men in the world.”

Now, they are now out of the incubator and have moved 20 miles to Palo Alto. Paraform technology has been lapped up by the studios who believe they can use it to create even more realistic computer animations . It already been used in a couple of movies. Now they plan for it to be used in automobile and industrial design.

The company’s burgeoning success was recognised earlier this year with the completion of a second round of financing from a high-powered investment group led by Chase Capital Partners. In fact the investing partners are the same ones that participated in Paraform’s very first round of financing.

“The fact is it is rare, even in Silicon Valley, that new technology as compelling as Paraform’s emerges that can fundamentally change the way business is done,” explained Robert Greene, a general partner with Chase, “and when it does you don’t have any problems attracting investment. But then sometimes in Silicon Valley even when it doesn’t really change the way business is done, you don’t have any problems either.”

In fact according to the latest PriceWaterhouseCoopers survey, the amount of capital Silicon Valley companies raise in an average round of venture funding catapulted last year to nearly $7 million, up from a comparatively quaint $3.6 million in 1993.

Besides being able to throw better parties, buy real office furniture earlier, hire new employees much faster and at higher salaries, and afford the escalating prices of Valley office space, one clear place some of this new money is going is to public relations agencies. With new found fortunes, startups are buying, well, fame.

Venture capitalist Ann Winblad of Hummer Winblad has publicly offered this advice to startups‹be prepared to spend upwards of $300,000 a year on communicating your message through PR and budget the money upfront in the business plan. The main reason for all this is simple. Since more companies are being launched in Silicon Valley each year, there’s now a greater urgency than ever to get noticed above the crowd. The idea that seems to have taken hold is that the more visibility you get, the more money everybody thinks you’re worth.

Another company that has handled its PR as effectively as its product development is Pocket Science, founded by former investment banker Neil Peretz. It too is one of the companies featured in Wild At Start. Their aim is to “bring e-mail to the masses” by letting low-cost units send and receive e-mail through any phone.

The first unit was released in the US before Christmas, priced at $99, and designed to take advantage of the frighteningly fast penetration of e-mail throughout the US. In fact according to estimates by Forrester Research, the number of e-mail users in the United States alone is expected to grow from 75 million in 1998 to 135 million by 2001.

Pocket Science too are ‘hot’, their technology all too attractive to any umber of manufacturers, although Peretz says it was far from easy securing finance for a product that required mass market support (he says they prefer business to business software that only needs a relatively small number of customers - such as that offered by Paraform). The technology though is simply part of the story.

Just as important for the founders is making these companies as completely different as possible to the major corporations that everyone chose not to go to so they could be in a start up.

Which is the latest shots filmed of the 30 Pocket Science staff, are not of people sitting in front of screens or pitching for finance, but of them out on a day’s white water rafting. It is also why they have themed rooms throughout their offices: there is one room kitted out like a saloon from the Wild West. There is a meeting room adorned with life-size Star Trek cut outs and the motto emblazened on the wall: “To boldly go where no e-mail has gone before”. Another room is being opened with a Polynesian theme and there is the Café OK. “It’s fun,”says Peretz, “people like to work in this environment, and it¹s actually cheaper than cubicles - I have to say that for the investors.”

But there is a downside to all this. For all the money flying round the Valley, there is still risk and fortunes can be lost as well as made.

People tend to get caught up in the whole start up process,” says Neil Peretz at Pocket Science, “they’re more interested in their IPO than in actually making a product that people want. The problem is that in this climate people tend to do things against their personal nature, and they’ll do anything in order to get involved in a start-up. But they forget that a start-up can be a real roller coaster and people sometimes get caught in the downside.”

Such caution is completely justified. The chances of making it in the Valley might be better than almost anywhere else on earth at the moment, but they are still relatively small. Slightly more worrying are the words of caution for those who make it. Hans Severiense is a 65 year old venture capitalist who observes : “They get the house. They get the boat. They get the apartment in the south of France. They get the new wife. But all that takes only a couple of million. What do they do with the other millions? These guys are not golf players. They like the thrill of being involved. I think some of these people are a little bit lonely.”

But for those at the heart of it, there is nothing better. “The sheer excitement of commercialising technology is incredible,” says Venkat Krishnamurthy. “My plan has always been to do this for several years, turn Paraform into a big company with several hundred people working for it and then I’ll probably do it again.” Of course, young entrepreneurs all over the world talk like this, and they probably mean it. The difference is that in Silicon Valley, it is all too likely to come true.