16 Jan 2012 we met with Alain Labat of VaST Systems (acquired by Synopses). He began work in San Jose in 1980 working for the engineering systems division in Xerox, at the PARC (Palo Alto Research Center). Back then, Silicon Valley was just that, Silicon Valley. Now, the area only focuses on semiconductors up until Mountain View, and then it becomes Social Media Valley. From Palo Alto North it is Software Valley. This is a fitting (and explanative) simplification. His current office space, naturally since he has dealt primarily in semiconductors, is in the original heart of silicon, Santa Clara. Alain also explained a unique perspective on how he saw the VC and investment side of SV change over the last 20 years, moving from a period where every company ended in an IPO, and investors couldn’t wait long enough to throw ridiculous amounts of money in the mix, to the post-dotcom era where only a few small few end in an IPO, some end in an M&A exit, and most just die out. Because the culture has changed from expecting an IPO to an M&A exit, Alain has therefore established a business in this very niche—consulting with startups who want to be bought out find a buyer.
It was also interesting to hear about historical returns. Here are the two main things about SV investments and venture capital: 1) there are a few highly successful SV VCs (Sequoia, PC are the exceptions), and the majority from 1997 have broken-even or have returned negative (1.5% return overall). Since DotCom bust in 2000/2001, statistically speaking the average return has been much lower, and investors are not getting the huge return from the 1990s. Adding to that, as previously mentioned, there are very few exits (e.g. IPO), so it is difficult for an investor to get money out. And, more importantly for an entrepreneur in today’s game, right now there is more money than good deals. But at the same time, people want to invest less than previously, so the smartest strategy is to put together funding in tranches, rather than expect one big fish. This reaffirms what my business partner, Nimish Jalan of UnemployedMBA.com and I have been blogging about for a while now—that NOW is a great time to be an entrepreneur (if you have a good idea and are willing to take the risk, and are willing to deal with the nuisance of constant fundraising). Speaking of risk, Alain identified the willingness to take risk as the key feature of a successful entrepreneur. Not that taking risk equates with sure success but rather that taking calculated risks, AND not being afraid to fail will lead to a greater chance of achieving greatness.
Alain currently is on the board of a company that is trying to redefine the semiconductor industry, where one needs about $50-75MM, plus 36 months of development, to even get into the game, and then later having to readjust specs based on your partner/sister companies’ requirements in Japan or China, resulting in substantial added costs. To convince someone to fund this sort of start-up, traditionally it has been very difficult–a huge track record is needed to get $75MM (and a 5X multiple is what is expected from investors). The problem is this: how to get the startup costs down to $10-15MM and finish development in 1.5 years? Well, Alain thinks the answer is virtualization, which he is currently betting on in his latest venture. This way, you only move to manufacturing when your customer agrees to the specs of your chip (which can be all specified out virtually).
Sounds like a great bet to me. Where can I invest?