Tuesday September 28, 2004 Deal Flow

Tuesday September 28, 2004 Deal Flow

It's 11:35 on Tuesday morning, accelerating smoothly from Embarcadero Road onto the southbound on-ramp of Highway 101 in Palo Alto; I take aim for the DoubleTree Hotel in San Jose right off 101 at North First Street. I'm going to meet two guys, modern day gold diggers in the best tradition of Silicon Valley. The have found the equivalent of gold and they want someone to turn it into wealth. I think I know someone and they want to tell me enough about what they have that I can convince the modern day Merlin to work his magic for them.

The DoubleTree Hotel is one of those hotels that are like an oasis at the center of a number of trade routes. It is near the junction of Interstate 880—what used to be California Highway 17, and Highway 101, the modern day "Camino Real"—some of its length passes over the original North-South Spanish road though today it carries 21st-century kings, captains of industry commuting from their Palo Alto, Hillsborough, Los Altos digs to their high-rise offices in Sunnyvale, Santa Clara, and increasingly San Jose.

One of the guys I'm meeting, JL, I've known for several years—since the late 1990s. His friend, AP, is new to me. We meet in the coffee shop of the DoubleTree and are seated immediately. No sooner are we settled than a familiar face approaches our table. I haven't seen TS for a couple of years—since the last party my company threw in Anaheim at the House Of Blues. He comes up and we shake hands and he looks at AP and the two of them immediately know one another. None of us has called the other by name, each of us desperately trying to remember the other's—the effects of old age becoming glaringly apparent. TS is in town raising another round of funding. He's moved to Austin to head up a company making big ticket test equipment for the electronics industry. The VCs brought him in to turn things around. "We're making money, not a lot but we're making progress and this second round looks good," TS says. AP and I wish him well and he runs to catch up with his guests.

AP and I look at each other and we both start to rhyme off companies we know TS has been at, one where he and AP worked together. I tell him I'll remember the guy's name and we go on about our business. JL and AP start describing their golden nugget. It's much more valuable, this nugget of gold in China than in the U.S. The nugget these guys have is plentiful here but virtually nonexistent in China. As we're talking I feel a hand on my shoulder as a tall moustached fellow walks past and I look up to recognize GS, who I did some work for ages ago when he had a market research company. He doesn't stop but rather waves. I'll have to send him an e-mail. I've lost his contact info but I know where his daughter works and she can pass it along.

The two guys I'm sitting across from at this rectangular table are both engineers as you might have guessed. We order. Both of them have the $8.00-hamburger. I opt for the soup and salad at the lunch buffet. I can have dessert, the waitress reminds me, but I offer it to her instead and she declines. We talk about the amount of networking going on in the room, not to mention the amount of snooping. They tell me more of their venture, heedless of those around us who might be listening in. The details are sparse but they convey the concept my lunch mates are developing. In a nutshell they have a piece of intellectual property they would like to convert into silicon. They want someone who is willing to invest the money needed for them to complete their development and pay for the cost of a finished silicon chip, about $1 to $1.5 million, not a large sum by VC investment standards in Silicon Valley. An angel investor with a few hundred million in the bank could pick up the tab by himself.

(“TS” I say to AP and his face immediately registers the recognition of face and name. We both recount more of TS’s career from the late 1980s to his move from California to Texas where his new company is based. “Who would have guessed TS would leave Silicon Valley?” AP asks, a question often voiced of late in the current state of depression the valley finds itself in.)

China would like to have the intellectual property these two guys have in the same abundance it’s found in the West. However, the Chinese must either pay the steep price to buy the rights from U.S. companies or develop it themselves, an undesirable alternative for a nation impatient to have everything its Western neighbors have immediately. The one option the two guys across from me offer is the know-how to quickly create this property for the Chinese and get them to where they want to be at the relatively modest cost of enriching five guys—I learn there are others in the larger design team.

Everyone in Silicon Valley has an idea that needs funding, knows someone with the money to fund the idea, or can act as the bridge to bring the two together. I’m a pretty rickety bridge, but I do know someone that is tied into the government bureaucracy in China. There are countless numbers who I’m sure can make the same claim. But the guy I know, BW, is with a company based in Shanghai that has the charter to help bring ideas to China’s new production facilities to get turned into silicon.

It was BW who over lunch one day described the Chinese government’s plan for acquiring just the kind of property my two associates across the table are developing. My whole life before my present job was spent as a trade magazine journalist and I would go from one office building to the next in this valley listening to companies talking about what they had and what they needed. What I found mostly was the enormous amount of work being done to produce the same end result. It’s even more apparent today, with video games, cell phones, DVD players, etc. It’s the equivalent of thousands of miners all looking for a rich lode of gold until one of them finds it, like the first HP Inkjet printer or the Apple iPod.

The Greeks had a word for this relentless pursuit: "arete"—striving for excellence. If you look around Silicon Valley you can clearly see that ancient culture in its fullest realization. Here is an unapologetic meritocracy where excellence is rewarded handsomely and failure is just as otherwise extreme. The most graphic visual can be seen in the stock transactions of any high tech company located in Silicon Valley: a quarter of exceptional growth gets rewarded handsomely. A quarter of average growth produces extraordinary downside.

Both of the guys I’m having lunch with believe their idea has merit. It remains to be seen if that belief has merit. Maybe I can help.