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

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Valley Boy: Part 1 of an Interview with VC Pioneer Thomas J. Perkins

Thomas J. Perkins is a Silicon Valley legend. In 1972, Perkins, a former Hewlett-Packard executive, and Eugene Kleiner, a founder of Fairchild Semiconductor, created one of America’s landmark venture capital firms, Kleiner, Perkins. The partnership made its mark with two blockbuster investments: Tandem Computers and Genentech, the first successful biotechnology company. As chairman of both companies, Perkins played a huge rule in developing each of these groundbreaking, multi-billion dollar businesses.

Today, Perkins is more well-known for his role in helping to expose the spying scandal at Hewlett-Packard, where he was a director of the company. I got to know Perkins when I interviewed him several times for my book. In November, Perkins dropped by the BusinessWeek office to plug his new memoir, Valley Boy. Although he is not actively investing today, Perkins was as forthright and insightful as ever, looking trim and dapper in a blue, peak-lapel suit.

In the first part of this two-part interview, Perkins discusses the state of venture capital, his views on various technologies, why Microsoft doesn’t scare him as much, and the future of Silicon Valley. (Yes, he think we’re seeing some signs of a bubble.) In the second part of our interview, which we’ll publish on Monday, Perkins offers his candid comments on Hewlett-Packard and how he helped to turn around the company.

Is Kleiner Perkins not funding Web 2.0 companies anymore? There was some discussion of that in the blogosphere recently, with valuations for Facebook and other Web 2.0 companies getting really, really high.
I’m not aware of that. A lot has been done but we haven’t made it an official policy. I love bubbles. We made a lot of money in bubbles.

Every time Google passes one of the century marks, 100 to 200 to 300, everybody said, “My god.” If you bought Google on the offering you would have made about 10 to 1. Is the market always right? No. Is it always wrong? No. You don’t get rich by betting against the market.

Is there too much venture capital floating around?
There’s always been too much money in venture capital. It doesn’t mean you can’t make too much money in venture capital.

What’s the worst investment you ever made?
There are so many. Hundreds of them. In all of these things if you put the risk up-front and use your initial money to try to reduce the risk, you won’t lose that much money. But one Google covers an awful lot of early stage losses. That’s just the way the business works. When you write the check you think it’s going to be a home run. You’d never knowingly say this one isn’t quite as good. If you think that, don’t write the check.

Speaking of Google, what do you make of all this talk about platforms?
I am on the board of News Corp. so I am delighted to see MySpace participate in this war. The growth is just incredible and the involvement everyone has with these platforms. Five years ago I never heard of Google. Now I use it constantly

Did Rupert Murdoch bring the MySpace acquisition to the News Corp board?
Yes. And he discussed it with me a little bit ahead of that. I was very enthusiastic about. He discussed another one with me, which I won’t mention, that I was unenthusiastic about. It was acquired by somebody else and it has fizzled. For a long time I was Rupert’s listening post in Silicon Valley.

Why were you enthusiastic about it? A lot of people thought he was kind of crazy.
Because of Google. And because these things can take off. I thought it was a good bet. The people were impressive.

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

What do you think about this whole movement to open the wireless world?
The phone companies scare me. The size, the power, the investment. They have the customers. They’ve got everything except for the last quarter mile. So they’re tough but they don’t move very quickly. An agile group like Google can do pretty well.

Does Microsoft scare you?
Not as much as it used to. They are a great company. We’ve always used them as a partner and as a target. I think that will continue.

Will Kleiner Perkins be around another 30 years? Succession has always been a challenge.
We are in our 35th year. We are on the threshold of another fund next year, which I think will be number 13. So we’re doing pretty well. We’ve lost some partners, but never in an angry or competitive way. We’ve had more retirements than the competition. We have a very good management structure: Ray Lane, John Doerr and Brook Byers are the three managing general partners. They are all pretty comfortable in the saddle. None of them want to quit. And we’ve got some pretty interesting folks coming up behind them. I think it depends on the bets we make, rather than who is in the pipeline.

Are you still bullish on green technology?
Yeah, there’s so much momentum. There’s fresh technologies and new things to be done.

It’s not trendy?
Sure, it’s trendy but you can’t ignore trends.

Will the credit crunch affect Silicon Valley earnings? Anything to worry about there?
No. There’s far more than adequate capital, as we’ve said earlier. It’s always a good time to be in venture capital. If the markets come off a bit, the prices come down. You can’t look at the stock market and decide whether or not to invest in a startup venture. You have to totally ignore that. You have to assume sooner or later there will be a market for liquidity. After all, the growth of technology has been just about the only constant in our economy for a very long time.

Do all these proposed tax increases on venture capital concern you?
Yes. I would hope that there’s an adequate distinction between a venture capital fund, which has a very long time scale, and something that’s measured in months, as in the hedge fund world. And maybe the tax code has to recognize that.

Historically, Congress has been pretty good in understanding what venture capital has been all about. When I was chairman of the National Venture Capital Association I lobbied to reduce the capital gains to 20% from 28%. President Carter vetoed that. But [Congress] overrode the veto. So Congress understood the importance of venture capital. I used to say venture capital was like a pilot light. But now it’s like a roaring glass furnace.

Do you worry about liquidity, in terms of how companies can sell out
If you have a good business there is always liquidity. The value has to be there. It has to be a decent business. It used to be in earnings per share, and now it’s in market share or growth rate. It can’t be smoke and mirrors.

Doesn’t that sound a little bit like the thinking of the bust?
Yeah but we can’t ignore that. It’s value. If you’re like us and get in on the ground floor, it’s always OK.

Where would you be if you were just getting into the Valley today?
Always as an entrepreneur. Never as a venture capitalist. My advice: You can go to Wall Street and get in on the ground floor of the next scandal. And there will be one. You can become a venture capitalist, and you might do alright. But if you really want to have some fun, make an contribution, and maybe make money, you become an entrepreneur. It’s a buyer’s market for entrepreneurs. There is so much venture capital out there. As I said in my book, money is the least differentiated of all commodities. And venture capitalists are in the business of selling money.

Do you sense that Silicon Valley is doing well today?
It’s better. The Valley is a meritocracy. It’s taken for granted. But it is a true meritocracy But it’s tough, too. An entrepreneur can fail and still get backing for the next deal, if we think he failed for the right reasons. We have primarily invested around the Valley and now we are branching out into China and far afield.

Now that you are going overseas, how will globalization impact America as money starts going overseas?
It’s not our primary focus. It’s still experimental. We don’t know how it’s going to play out. We are moving carefully and deliberately. I am very optimistic about the Chinese-American relationship. Always have been. I’m not concerned about co-habiting with the enemy or anything like that.

Do you think about investments differently there?
Oh yes. Historically, we never went very far from Silicon Valley because we couldn’t drive there and check on [the investments]. China is quite far away but we have a partner who commutes to China every couple weeks. We don’t know the [Chinese] as well but they come to us as well. There’s a lot of interaction. We think we’re doing it in a cautious careful way.

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