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The Pace Has Slowed but Silicon Valley Still Attracts Entrepreneurs

February, 2002

STANFORD GRADUATE SCHOOL OF BUSINESS—The year 2002 is a great time to start a new company—if you go about it the right way. That was the message of speakers at the sixth annual Stanford Conference on Entrepreneurship, held Feb. 23 at the Graduate School of Business.

The years 2000 and 2001 saw the death of many startups, but that doesn't mean that new businesses launched in 2002 are doomed, agreed investors and entrepreneurs at the annual conference sponsored by the School's Center for Entrepreneurial Studies and run by the student Entrepreneur Club.

Rick Thau, executive-in-residence at venture capital firm InterWest, recalled starting a company during one of the worst recent downturns, the Gulf War. "If you're looking to start a company that will create enduring value, this is one of the best times to do it," he said. Susan Mason, a general partner at venture capital firm ONSET Ventures, concurred. "If you look historically, the best companies are born during down cycles."

Why should entrepreneurs act now? "The marketplace is a little less crowded," Thau pointed out. Mason added that numerous "dream teams" of potential employees are looking for work in Silicon Valley, and their insights and management capabilities could jump-start new companies. With the rise in unemployment, even average employees are easier to hire.

Companies also have the downturn to thank for cheaper rents and more vacant office space available for subletting. Salaries haven't fallen enough, Mason said, for the Valley to become as competitive as she'd like, but that could happen, too. "Overall, we're very optimistic about starting companies," Mason reported.

Investment dollars are available, venture capitalists said. "There is $64 billion in overhang in the venture industry that has not been spent yet," Mason said.

That money could fund many new businesses—but it comes with strings attached, entrepreneurs said. For them, launching a new business now isn't a complete walk in the park.

Terence Craig, co-founder of the now-defunct Optimize Solutions, described his firm's birth in a two-bedroom apartment in Belmont, California. The worst thing for entrepreneurs is that the cost of capital is very high. "You give up more of your company to get funding," he said.

"The good news is that's going to impose fiscal discipline," Craig added. In addition, investors are looking for experienced team members—which also will make companies more stable in the long run. "Youth and napkins are out—people are really looking for gray hair and business plans," Craig said.

Another bad news-good news aspect of the "new new economy" is how fast bad businesses die, said Craig. "It's a good thing, because people move on quicker," he remarked.

Entrepreneur Spencer Rascoff, co-founder of Internet price-comparison and ticket-buying service Hotwire, argued that past failures can mean future successes. "The reason 2002 is a good time to start a company is that we can learn from all the mistakes that companies before us have made," he said.

Entrepreneurs and investors agreed that companies were being given more time to build their businesses without investors expecting as rapid a return as they did during the bubble. "There's a trend back toward a traditional venture model," said Mason. "We expect a company to take five to seven years to develop."

Several speakers underlined the importance of gaining customers—even before seeking outside funding. "Once you have an idea, the best thing to do is to show up with customers," said Craig. "Show how you're going to make money."

Larry Page, co-founder in 1998 of the Internet search engine Google, stressed the importance of developing technology that customers want. In his keynote speech before a capacity crowd in Bishop Auditorium, Page said that instead of emphasizing marketing, companies should pour resources into developing the best products possible.

"It's a common fallacy that technology doesn't matter," said Page, who received a masters degree in computer science from Stanford and is now the president of products at Google. "Industry ignores user needs," he said, citing the example of an executive with another search engine who said during a meeting that his product was 80 percent as good as his competitors'. The executive claimed that good marketing could make the difference irrelevant. Not so, Page said, pointing to the rapid migration of users to Google—the search engine went from 1 million to 50 million users in just three years

One barrier to product innovation is large development teams, which can result in inertia, Page said. Also, sales departments urge companies to build "what the customer wants, which is exactly what other competitors make"—not something completely new.

Page advised entrepreneurs to ask themselves this simple question: "Do users really care?" A good entrepreneur will find the answer, and act on it.

by Meredith Alexander

Related Links

Report on the 2001 Entrepreneurship Conference
Report on the 2000 Entrepreneurship Conference

Related Research Centers
Center for Entrepreneurial Studies