The following is a speech delivered on December 2, 2001 by Sequoia Capital partner Michael Moritz to the Israel Business Conference.
Last week Thanksgiving was celebrated in the United States, That is not the best of times to be a cranberry, pumpkin or a turkey. But it is a splendid season to be an American. And this year – as the wicked shadows of terrorism also stretched across our land – Thanksgiving came with all sorts of special meanings.
Last week also marked the publication in America of an extraordinary book. It is one of those books that reassure you that anything is possible. It is the story of an underdog and the story of the underdog is, of course, the tremendous struggles of start-up technology companies.
The subject of the book was born a Jew in Hungary in the 1930s. As a baby he suffered from scarlet fever which left him half-deaf. As a child he survived all the terrors of a country under the jackboot of Nazi occupation. And as a boy and student he grew up under the crushing heel of Stalinism. After the Russians invaded Hungary in 1956, he walked across muddy fields in the pitch dark to Austria and the West and eventually found his way to the United States where he only knew two people. His name was Andris Grof. You will know him better as Andy Grove the co-founder, CEO and Chairman of Intel – one of the world’s finest companies. Andy’s tale is, in many ways, the story of Silicon Valley and it is, I think, also a tale that lies close to the heart of your country.
Intel was among the first wave of American companies to recognize the promise of Israel and establish a presence here. Intel is a Silicon Valley parable. It was a company created in the forge of adversity and it was hammered into shape on the anvil of competition. It is a company that sees no difference between genders or between races or between religions. It is a company that doesn't differentiate between Indian and Pakistani; Taiwanese or Chinese; Turk or Greek, French or German, English or Irish, Arab or Israeli. It is also a company that came to flourish between the end of the Vietnam War and the start of the current War on the clear morning of September 11th. This period of peace – which was only interrupted by the half-finished expedition in 1990 to remove the butcher of Baghdad – has been the longest period of peace in the history of the American Republic. Make no mistake about it: peace, certainty and predictability have been a wonderful boon for Silicon Valley. For peace, certainty and predictability are the greatest companion, hand–maiden and cup-bearer of commerce.
It is no coincidence that some of the world's greatest technology companies have started, grown and flourished during this prolonged period of tranquillity. The last time American cannons were fired for any extensive period – Microsoft, Cisco Systems, Sun
Microsystems, Oracle, AOL, Dell Computer, Amgen, Genentech and Flextronics – did not exist. When the Vietnam war ended, there were only a couple of hundred e-mail addresses, no personal computers, no cell-phones, no satellite or cable television, no scientific workstations and people were still trying to figure out whether the microprocessor was good for anything but a rudimentary calculator. Now, barely one generation later, thanks to advances in chip design, computing horsepower and a massive expansion of bandwidth, millions of people around the world can log on simultaneously to a webcast of the Victoria’s Secret catalog and download the new Britney Spears album. That’s real progress!
I know many of you are interested in a candid, unvarnished assessment of what business life is like at the moment in Silicon Valley. I know too that there are plenty of economic worries here. But rest assured – beyond the headlines that tell of layoffs and bankruptcies, beyond the companies that keep missing their earnings estimates, beyond the credit crunch, beyond the firms struggling to raise money life in Silicon Valley is pretty healthy.
We have emerged nicked – but unbroken – from an unprecedented period in the history of Silicon Valley. The forty-eight months between 1996 and the turn of the century were a time when there were three burners beneath the pot of Silicon Valley. There was the burner fired by the promise of the looming crisis of Y2K which ignited a large surge in IT software and services spending. There was the burner inflamed by the act that deregulated a large part of the U.S. communications infrastructure and which, in time, led Wall Street to raise more than $700 billion dollars for communications companies – many of which are bankrupt today. Finally, there was the promise of the Internet – which allowed everyone who previously would barely have had enough skills to operate a corner store, to open an Internet retailer.
Though today many people claim that they kept their heads during this period, I’ll wager that not a soul went untouched. Jack Welch, the former head of General Electric and an icon of American business, agreed to join the board of directors of IdeaLab – which crumbled soon after. Cisco Systems found itself sitting on $2.5 billion of inventory. Lucent and Nortel extended vendor financing to weak companies. Exodus, Webvan, Northpoint, e-Toys, Healtheon, Teligent, Rhythms, Excite@Home, lie in ruins.
Spectacular business calamities are the casualties of progress. Change, invention and promise have always attracted large amounts of money and copious numbers of imitators. It was true of the first speculative excitement in the United States: the rush for gold and silver one hundred and fifty years ago. Later, thousands were attracted – and most of them were disappointed – by the lure of oil. For every railroad baron there were hundreds who found themselves bankrupt. When the silver screen started to flicker many thought it would be easy to become a movie mogul. Between 1900 and 1920 hundreds of automobile companies were started. All of us know how few have survived until today.
In our time, the same has been true in the world of technology. For every great company in a new industry, there are scores, sometimes hundreds, that fall by the wayside. It’s been true in every aspect of the semiconductor business, the mainframe computer business, the minicomputer business, the mainframe computer business, the minicomputer business, the personal computer software business, the magnetic storage business, the tape storage business, biotech and the Internet. the landscape of Silicon Valley is scarred with the remnants of forgotten companies, half-fulfilled promises and broken dreams.
In Silicon Valley the atmosphere has obviously changed. The commutes are shorter. You can find buildings to rent. The parvenus have gone. The arrivistes have disappeared. Most of the get-rich-quick artists have scuttled back to their shelters. Angel investors are only answering margin calls. You can see empty billboards alongside the highways. McKinsey and Goldman Sachs are no longer finding it difficult to recruit from the Stanford Business School. Today. The only people that dare to start or finance companies are those who are genuinely interested in building companies. Companies are leaner, inventories are down, the excesses have been trimmed away – and you can pick up tremendous bargains at industrial auctions. We have, I think, passed the bottom of the bottom.
So, why have we chosen to invest in Israel? For more than twenty years we only invested in Silicon Valley. We have had plenty of opportunities and invitations to spread our wings and invest elsewhere. From time to time it has been tempting to open an office in Boston, or Austin (Texas) or Seattle. But we have not done so. We have also resisted requests to expand to Europe or Asia or mainland China. The only place that we invest in startup technology companies – outside Silicon Valley – is Israel.
Israel has been the birthplace of essential building blocks for local area networks; high speed communication protocols; instant messaging; semiconductor capital equipment, breakthroughs in digital signal processing; in image processing; color printing and security software. From our perch in California, Israel is the only place that comes close to emulating the inventive atmospherics that we have on our doorstep in Silicon Valley. We have developed great admiration for the tenacity, frugality, determination and energy displayed by Israeli entrepreneurs. Starting a technology company is the toughest challenge in business. There are only two places you can really do it – Silicon Valley and within forty miles of where we are right now.
Some people ask whether we will always invest in Israel. My answer is the same as it is for Silicon Valley or for any industry segment that we target “nothing is forever”. But as long as the results, or potential rewards, outstrip the rises, we will invest here.
Now, a word about September 11th – the day Americans learned what it is like to live in the shadow of terror. It is also the day that provided a massive wakeup call to technology companies everywhere – and, especially, Israeli based technology companies. Now all of you have a new opportunity, a fresh responsibility and a massive obligation to the rest of the free world. We had the very best that your scientists and engineers can produce. We need your best security systems. We need your best disaster recovery software. We need improved wireless transmission equipment. We need better image processing. There are plenty of other areas in which we also need the products of your ingenuity and brainpower. If your best and brightest produce novel products that solve these problems, I’ll guarantee that together we will figure out a way to connect them very rapidly with customers in the U.S. - the world’s largest market for any technology product.
Let me end on a note of deeply felt hope. The spirit of Andy Grove lives. The springs of invention will continue to bubble. The streams of progress will gurgle. And the mighty rivers of commerce will always rush on. Scientists will make discoveries. Engineers will graduate. The restless and ambitious will forever form companies. This month – somewhere along the coastal range of California and somewhere here on the eastern fringes of the Mediterranean Sea – new companies will form. These acts of confidence, these signs of promise – so scorned by those who seek to upset our ways of life – will guarantee the future belongs to people who refuse to let the forces of darkness pull drapes across the light.
Published by Israel's Business Arena on December 3, 2001