Venture Capitalist Tom Perkins: 'If There Is No Risk, You Have Already Missed the Boat'Published: December 05, 2012 in Knowledge@Wharton
Take big risks, but take them very carefully.
That, in so many words, was the advice recently offered by Tom Perkins, who could be considered one of the world's leading authorities on the topic.
Perkins was one of the two co-founders of the fabled Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, which is marking its 40th anniversary this year. He has been associated with some of the world's most successful startups, including Genentech, Applied Materials and Compaq Computers. The 70-year-old Perkins has also made headlines outside of the business press -- his four-year marriage to romance novelist Danielle Steele, the novels he has written and, most of all, his construction of the Maltese Falcon, one of the world's biggest yachts.
During a recent visit to Wharton's San Francisco campus, Perkins talked about his long career in technology entrepreneurship, noting at one point that successful entrepreneurs need to carefully thread the needle as they tackle the crucial issue of risk.
He cited HP founder Dave Packard -- the man who had the biggest influence on him in his career -- who once said that a successful new company needs to bring a 10-fold improvement to some aspect of a product or market. "The word Dave always used was 'contribution,' [suggesting] that you should make a contribution of at least 10 times what is already out there. A hundred times would be even better. But if you don't strive for a 10-to-one improvement, you won't be successful," Perkins noted. "That's so fundamental a rule that it tends to be forgotten. There must be high risk -- in fact, very high risk. It's the key to success. If there is no risk, you have already missed the boat. Your competitors will already be there."
Getting the Right Answers
But taking a big risk doesn't mean necessarily blowing through a lot of venture capital money. In fact, said Perkins, smart entrepreneurs should arrange early, low-cost tests of their ideas to make sure they are on the right track.
His main example was Genentech, one of the first companies that attempted to market products based on the revolutionary recombinant DNA technologies that were emerging during the 1970s from the medical labs at Stanford and the University of California, San Francisco.
Two key technical questions needed to be answered, noted Perkins. Could a strand of DNA be spliced open at a precise location at the beginning of a gene? And if that were possible, could the modified DNA molecule then be closed back up? Before fully committing money to Genentech, Perkins and his collaborators contracted out those questions to two specialized research outfits. Only after they received positive lab results did they go ahead.
"We wanted to structure the deal so the risk was up front and not at the end," said Perkins. "We didn't want to spend $3 million on a company only to discover it didn't work. Instead, the investment was just $250,000, and it led to one of the biggest payoffs in history."
Perkins worked at HP during the 1960s running its newly-formed computer division. During his presentation, he frequently returned to the topic of Dave Packard, noting that "everything I ever learned about venture capital, I learned from that man." Packard and business partner Bill Hewlett, Perkins said, understood that successful entrepreneurship was a "top-down" undertaking, with a strong leader guiding an organization through what is often a lengthy, perilous process. "Decisions in venture capital cannot and should not be made by a committee," Perkins added. "A committee is like a convoy; it moves no faster than its slowest member."
And for that reason, Perkins said he wasn't a believer in "corporate VC," in which a company sets up a small division to make venture capital investments. They typically fail, he suggested, because those making investment decisions are overly concerned about failing and having the unsuccessful investment become a liability on their career path. "People are afraid they will get a black mark if their deal goes belly-up."
Two of HP's most important business decisions over the years, noted Perkins, involved entering the calculator and computer markets. Both were pushed hard by either Packard or Hewlett, often in the face of staff members telling them their plans would never work, and outside "experts" telling them there weren't large markets for the new products.
Packard and Hewlett "had no experience in either area, but still, they pushed the ideas through," he said. Both products ended up being worldwide hits.
A Personal Congratulations
According to Perkins, Packard was so appreciative of the idea of entrepreneurship that he allowed Perkins, even while employed full-time as an HP executive, to also run a laser equipment start-up at night and on weekends. The company, University Laboratories, was eventually acquired by Spectra Physics -- a sale which earned Perkins a personal congratulations from Packard. "He came into my office, put his arm around me and said 'Nice going,'" recalled Perkins. "How many executives, then or now, would have done something like that?"
Hewlett and Packard's other contribution to Silicon Valley, stated Perkins, involved probity; HP was known for being a highly ethical company that treated customers, employees and others with great respect. Perkins said that this ethic influenced him during the launch of Kleiner Perkins in 1972: One of the firm's first documents was an "investors' bill of rights" that laid out the above-board manner in which KPCB would invest its money.
Some of Perkins' greatest hits were leading-edge technology companies in their time which, for various reasons, weren't able to make the transition to the computing world of the 21st century. One of the best examples is Tandem Computers, whose board Perkins chaired during its entire 23-year history. The company was the first to make redundant, "fault-tolerant" computers that guaranteed 24/7 uptime.
While the machines had extremely high performance rates, they were less expensive than the IBM mainframes of the time. During the 1980s and 1990s, Tandem systems powered the New York Stock Exchange and most of the world's biggest banks. But high-end Intel servers slowly ate into their market, and in 1997, Tandem was bought by Compaq. It is now part of HP.
Perkins also noted that some of the tenets of Silicon Valley's early days are not being followed as much today. One example: 14 of the companies on whose board he served were taken public, including Tandem, and in every case, he would make sure the company's best years were ahead of it. The actual offering would be relatively small and at low prices, but with secondary offerings following in later years as the company became more successful. He said that this approach created long-term wealth for the company, its founders and its investors.
But current fashion, he added, is to have an IPO at the highest valuation possible, occasionally with companies that stumble not long after they are out of the gate. "Silicon Valley is starting to look like Wall Street," which Perkins described as "a conveyer belt of disaster."
During the Q&A session, he was asked if VCs like to see a complete management team in place before they fund a company, or if they are satisfied with the prospective business simply having a good idea.
Perkins said he is among the minority of VCs who are interested in the idea more than the management team. "Why would anyone good join a high-risk startup?" he asked. "Remember, this is early stage stuff. What you need to do is develop the idea, get the risk out up front, then roll the money in and develop the company." At that point, he said, experienced high-profile executives can be brought in.
Another student wondered what role, if any, cronyism plays in the decision making of venture capitalists. Perkins' answer: None. "Cronyism is almost non-existent in Silicon Valley. Silicon Valley is a meritocracy. You have CEOs from every race, nationality and gender."
He then went on to explain one aspect of Silicon Valley that some observers might confuse with cronyism. "We don't have a sales force" at Kleiner Perkins, he noted. "But we have financed more than 500 companies. So we have all those CEOs and vice presidents out there. And they are our sales force. They are constantly talking to people and hearing about things. So when one of them calls us and tells us about a good idea, we are on it, instantly. That is the best way to get through to us. There is no cronyism. But there definitely is networking."
In the end, he said, it all comes down to entrepreneurs. "At Kleiner Perkins, if someone has a good idea and the makings of a great entrepreneur, but they don't have a business plan, we'll write a business plan for them. We love entrepreneurs."