What Arthur Rock Looked for in Entrepreneurs

Here’s a story published recently in Investor’s Business Daily about legendary investor Arthur Rock. One of the pioneers of the venture capital industry, Rock famously put together the deals to found Fairchild Semiconductor and Intel, two of the most important startups in the history of Silicon Valley. Rock later invested in Apple, capping off his incredibly successful career. The investment landed him on the cover of Time magazine, a story that I discuss at length in my book. In fact, Rock was a student of Georges Doriot at Harvard Business School.

Rock and Doriot actually had many things in common. They were both investment bankers who became successful venture capitalists. They both understood the importance of technology. And they both believed that people, more than ideas or markets, were the most important ingredient of success in a business venture. Doriot’s famous saying was, “I’ll take an Grade A individual with a B idea over a Grade B individual with an A idea.”

The writer Reinhardt Krause interviewed me for the profile and kindly included a quote from me in the story. It’s an interesting profile that tries to explain Rock’s investing philosophy. Among the most important traits Rock looked for in an entrepreneur? Intellectual honesty. Rock knew that a new business would face many challenges and that in order to succeed entrepreneurs needed to be honest about the state of their business. Or as Rock rhetorically asked: “Do they see things the way they are, and not they way they want them to be?”

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Intel Could Be on the Hot Seat (Again)

Tech trust-busting is back in vogue in Washington, and the timing couldn’t be worse for chipmaker Intel, says my colleague Aaron Ricadela.

Writes Ricadela: “In a May 11 speech in Washington, D.C., Assistant Attorney General Christine Varney announced a return to “vigorous antitrust enforcement action” by the Justice Dept. The government will “take a new tack” toward redressing monopolistic practices and wield active antitrust enforcement in response to the “economic distress” that can result from uncompetitive markets, Varney told an audience at the Center for American Progress, a liberal policy research group. She also warned courts and parties to lawsuits against invoking the antitrust policies of the Bush Administration, which has been seen as softer than the Clinton Administration in going after allegations of anticompetitive behavior.”

Check out the most-read story on BW.com today.

Wireless: The Outlook Gets Murkier for Clearwire

BusinessWeek just published my story on what many folks consider broadband’s best hope for injecting more competition in the market for high-speed Internet access.

It’s about Clearwire, the WiMax startup founded by wireless pioneer Craig McCaw. The company has a very bold (and expensive) vision for rolling out fast Internet access through the ether but it’s getting caught up in the credit crunch right now.

Here’s the top of the story:

Last May some of the biggest names in the technology and media business, including Intel (INTC), Google (GOOG), Sprint (S), and Comcast (CMCSA), teamed up to invest $3.2 billion in the startup Clearwire (CLWR). The Kirkland (Wash.) company founded by entrepreneur Craig McCaw had high hopes of shaking up the wireless industry. The idea was that Clearwire would offer an alternative to the two big incumbent U.S. operators, AT&T (T) and Verizon Wireless, by rolling out a technology called WiMAX that could provide superfast Internet service for cell phones, laptops, and other devices.

Today, Clearwire is just trying to keep its head above water. Although sales are on track to rise 50% this year, to $230 million, analysts expect the company will lose $715 million. Billions more in losses are projected for the coming years as Clearwire invests heavily to roll out its network. Clearwire needs to raise billions in additional capital in the midst of the worst economic downturn in decades or it will be forced to slow the pace of its rollout and give AT&T and Verizon a chance to gain ground in the race to build next-generation wireless networks.

Clearwire’s stock has plummeted 90% since its peak in mid-2007. The sharp fall has prompted backers to announce write-offs on their investments, including a $950 million charge by Intel, a $355 million charge by Google, and a $350 million charge by Time Warner Cable (TWC). Comcast is expected to follow suit.

Click here to read the rest of the story.

On the Road: Back from My Mini-Book Tour

Hey folks. Sorry for not posting the last few days but I’ve been on a cross-country whirlwind tour promoting my book and speaking about it.

The trip began at the Nantucket Conference on May 2-3, where I was invited to sit for a fireside chat about my book with the entrepreneur/venture capitalist/all-around cool guy Vinit Nijhawan.

This week, I took off for Northern California. On Monday, I was invited to speak on a panel about book writing at the Graduate School of Journalism at UC-Berkeley. Afterwards, Matt Richtel of the New York Times and Marcia Parker, who co-teach a course called “Covering Silicon Valley, invited me as a guest teacher. And then on Wednesday I moderated a panel at the National Venture Capital Association conference on corporate venture capital. It was a great session with Arvind Sodhani, the President of Intel Capital, and Steven Weinstein, who heads up venture at the biotech giant Novartis.

I will be publishing a few posts about these events over the next few days.

Decoding Apple’s Earnings

There are some brands that consumers just can’t resist–even during a recesion. Apple is one of them. Here are my top three takeaways from Apple’s earnings announcement:

The Mac rules: Analysts were expecting Apple to sell between 2.0 to 2.2 million Macs. In the first three months of 2008, the company sold nearly 2.3 million–handily beating estimates. Both the desktop and laptops are on fire. More than ever, the Mac is the engine of Apple, with the iPod and iPhone sales growth rates slowing. Mac revenues grew 54%, while shipments grew 51%, helping Apple to snag 6% of the US PC market, up from 4.9% a year ago. There is huge upside potential for the Mac–especially as corporations warm up to the platform.

Vertical Integration: Perhaps the most interesting announcement Apple made yesterday had nothing to do with its earnings. By confirming that it had purchased PA Semi, a fabless chip designer, for $278 million, Apple declared a new strategy of vertical integration. It also suggests that Apple will likely expand its product portfolio even further–otherwise why spend money to guarantee your company chip inventory if you were not going to need more of it down the road. The purchase is also a blow to Intel, which hoped that its new low-power Atom chip would be chosen by Apple. Apparently, PA Semi’s chips are very efficient yet powerful, requiring 30% less power.

One interesting side not: PA Semi was founded by a former star engineer of Digital Equipment–Dan Dobberpuhl–who helped design the StrongARM chip that eventually became the XScale processor.

Unlocked phones are a growing problem: The big mystery of the quarter was why Apple lowered its profit forecast from $1.10 to $1. My hunch is that the growing number of unlocked iPhones is the culprit. Most analysts estimate that there are about 1 million unlocked iPhones, or phones that have disconnected from Apple’s preferred carrier of choice. The problem for Apple is that when customers unlock the phones, Apple does not get an undisclosed fee from the carrier. This is not chump change. For every 1 million iPhones that get sold for unlocking, Sanford Bernstein analyst Toni Sacconaghi estimates Apple forgoes $300 to $500 million in future revenues and profits. On the conference call, Apple admitted that the number of unlocked iPhones “remains a significant number.” Analysts estimate about 1 in every 4 phones is unlocked.

Here’s the dilemma, though: If Apple stopped the sale of unlocked iPhones (by forcing customers to activate them at the point of purchase, say) it might miss its target of selling 10 million iPhones in 2008. But if Apple does nothing, its margins and profits take it on the chin. (Unlocked iPhones generate 50% less revenue for Apple and 70-75% less profit, according to Sacconaghi). The black market also crimps Apple’s ability to grow in new markets. If Apple can’t stop the flow of unlocked iPhones into a country like China, why should a local carrier pay Apple a premium for the right to be that country’s exclusive provider?

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The Tech Earnings Safe Zone: Google, IBM, Intel and ???

Surprise! BusinessWeek reporters Spencer Ante, Heather Green, Arik Hesseldahl and Catherine Holahan dissect the big earnings reports from Google, IBM, Intel, Nokia and eBay. Watch the Digital Dish gang explain the washout that wasn’t.

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital and get a 34% discount, click here and go to Amazon

Intel Calms the Tech Waters

Despite the twists and turns and perpetual disruptions of the tech industry, Intel still remains a bellweather. So the chip giant provided a bit of relief to the wobbly tech sector when it said demand for its core computer and server chips remained strong. Profits fell 12% year-over-year, though, due to the struggling and commoditized business of NAND flash memory chips–silicon used in everything from music players and digital cameras to a growing number of laptop hard drives.

The highlights:

* First-quarter sales totaled $9.7 billion, an improvement of 9% over the year-ago quarter. Intel said revenue for server chips set a single-quarter record, while the PC chip business held its own.

* The company said it expects its second-quarter revenue to total between $9 billion and $9.6 billion, suggesting that analysts may need to tweak their forecasts upward.

* Intel is more global than previousy realized. During a conference call with analysts, Chief Executive Officer Paul Otellini said “75% of [Intel’s] revenue coming from outside the U.S. right now.”

See a good recap of their earnings report from my BusinessWeek colleague Arik Hesseldahl.

Valley Boy: Part 2 of an Interview with VC Pioneer Thomas J. Perkins

First off, some shout-outs are in order: Thanks to three of my favorite Web pubs–New York Times DealBook, Silicon Alley Insider and Valleywag–for linking to the first part of the Creative Capital interview with venture capital pioneer Thomas J. Perkins.

And now, in the promised second part, Perkins talks in depth about how he helped turn around Hewlett-Packard by forming a technology committee (a key move to boosting profits was dumping Intel chips for AMD chips), the pre-texting scandal and why he disagreed with Patty Dunn over practically everything. “Patty Dunn and I didn’t agree on the time of day,” says Perkins.

What struck me in re-reading the interview is the amount of passion that Perkins brings to his job, his love and deep understanding of the technology business, and the way that his battle with HP became personal. In fact, Perkins was so mad at the company for the way it handled the spying scandal that afterwards he bought chose to buy a computer from Lenovo–and not HP!!! “I was kind of mad at HP,” says Perkins.

What did you think about the 60 Minutes interview?
She kept asking me how much money I made. They tape hours. I thought it was OK. I wouldn’t have done it if it wasn’t Leslie Stahl. She kept saying, “This is not going to be about HP.” Of course, we ended up talking a lot about HP. I guess that was inevitable.

How do you think HP is doing?
I have no insider information. I am not on the board and Mark doesn’t call me up and tell me things. From what I can see, it’s in great shape. I have tremendous respect for Mark. He’s really smart and works well. He understands and has cultivated the technology. He has a real good relationship with the chief technology officer, Shane Robison, who I think walks on the water.

How much of the past problems were about leadership and how much were about strategy?
Strategy has changed. We did something unusual at HP when I joined the board. With Carly’s blessing, we set up a technology committee. The combined company was spending pretty close to $5 billion a year on R&D and the board was oblivious to what was going on. It’s a huge amount of money. So we established this committee. It eventually became the whole board. It met the day before the board meetings and really got into the strategic aspect of HP. The support of that committee made it possible for Carly and Mark to take some risks with the understanding that the board was behind us.

What were the risks?
There were three things. HP had had a very liberal technology licensing policy. Any salesman could mortgage the patent portfolio to get the next order. HP was actually paying out $100 million a year in royalties to others, and IBM, with a patent portfolio marginally larger, is taking in $3 billion a year. At the first meeting of the technology committee we changed that. I insisted that every single license had to be signed by Carly Fiorina. It was abrupt but it is working.

The second thing we did was to spend some money and get serious about competing against Dell Direct. Compaq had made a good start but the HP Web site was a nightmare. So we invested pretty heavily in that.

But the most important thing was we encouraged the company to redirect a lot of purchases of microprocessors to AMD from Intel. We slowly and gradually encouraged management to move in that direction. They did. A lot of the improvement of HP’s [profits] is a result of that. It was kind of touch-and-go for a few quarters as to whether we could do it or not, and we did. This is an example of how a board of directors can really help management. When Mark came in he did all that and more.

Is HP now making money off of its patent portfolio?
Yes.

Is it substantial?
Yes, and growing. A lot of these contracts have to expire.

Has Mark made it safe for technologists?
Yes. And you didn’t ask, but in my opinion he knew next to nothing about the spy thing. I apologized to Mark. I told him your job is to fix HP. My job is to fix the board. And I ended up resigning. He called me up and said, “Geez, how could you do this to me?”

Is it fixed now?
I think so. I still have some friends on the board and they say it’s humming.

Have you followed the Lenovo after it purchased the IBM PC company?
Only to buy one of the computers. It’s terrific.

You bought Lenovo instead of an HP?
I did. I also have an HP. I was kind of mad at HP. (Laughs)

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Who serves the role on the board now of championing technology?
There are still a few geeks on the board and there is still a technology committee. The key thing I wanted, and this is against the venture capital model, I wanted Mark to be chairman of the board. A company of that size, he had to be chairman, he had to set the agenda for the board. And that was fundamental difference between Patty Dunn and myself. What does the board do?

You meet at 8:30am and planes have to be caught around 1pm. An audit committee meeting can take an hour and you’ve got all the other committees. And then it’s almost time for lunch and you have a few minutes to talk about competition, strategy, growth rate, succession, the future, fundamentally important stuff. And it tends to get scrunched into a very limited amount of time. And if you don’t even think it’s important, it doesn’t get discussed. So Dunn and I really disagreed on that. I just felt the board had to keep the pressure on–marketing, engineering, succession, competition, doing it on and on.

Also Dunn and I disagreed on what kind of directors we should bring on to the board. I wanted to bring more entrepreneurs from Silicon Valley onto the board. Why? The product life-cycle of Silicon Valley is 18 months. And if you miss a cycle and you’re in real trouble. The sense of urgency about it all is essential to have on the board. Dunn felt we had to bring on people that Wall Street would know and appreciate. So we had a hell of a time.

So you’re saying the board trouble was over the chairman role? What about the pre-texting thing?
Carly Fiorina, not me, has said that the spy scandal was Dunn’s method of restructuring the board. Her primary hope was that I was the leaker. I wasn’t. Turns out she got rid of me and [George] Keyworth at the same time. Carly said that. I don’t dare say that.

So it was not at the root of your disagreement?
It was a lot of things. Dunn and I didn’t agree on the time of day. We started off pretty well. I encouraged her to be chairman. I got her some extra money. I encouraged her to be very active. And we would meet monthly and speak more frequently on the telephone. But it just became really tough going.

How did the relationship sour?
A little bit on all fronts. It was no one big thing. Directors, strategy, compliance experts, how the board spent its time, all these things.

If you had not resigned would all of these things have come out?
If I hadn’t resigned it would not have come out and Patty would still be getting awards for brilliant governance. I didn’t blow the whistle. I tried to get the company to fix it and investigate itself, and primarily stop doing it. If they had taken a serious look at it, I didn’t see how Dunn could continue as chairman.

I thought she could stay on the board. I thought the board would evolve into that conclusion but they didn’t. They stonewalled me for about three and a half months. My lawyer said, “Look Tom, you were chairman of governance. This theoretically all happened under your purview. You’ve got to tell the Securities and Exchange Commission.” So I did. And the SEC went public.

I thought a lot about it. In the end, I felt Dunn did not want to stop being chairman, that’s for sure. And I felt that she was pulling the company into a very bad place. So I decided to fall on my sword.

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital and get a 34% discount, click here and go to Amazon

CES–the New “Moronic Inferno”

Four BusinessWeek reporters–Heather Green, Arik Hesseldahl, Catherine Holahan and Spencer Ante–break down the week’s most important tech news events in this new online video show, Digital Dish. Among the highlights:
* Bill Gates, giving his last CES address, went out with a whimper
* The Halo Effect: Everyone in Vegas was thinking about Apple and its next move in digital media
* Microsoft acquires a search provider and Jimmy Wales releases a new search engine but will it move the needle against Google?
* Andrew Cuomo, the New York attorney general, sues Intel. Can he make the charges stick?

Coming Up: A two-part interview with venture capital legend Thomas J. Perkins

HOW TO BUY CREATIVE CAPITAL: To pre-order Creative Capital, click here to go to Amazon.com.