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Back to Basics

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PCQ Bureau
New Update

The Red Herring magazine called Vinod Khosla the king of Silicon Valley. In August 1999, Cerent, an optical networking start up conceived by him was sold to Cisco for $8 billion. Cerent had a revenue of about $50 million and was a prime example of a successful start up. Khosla, one of Sun Microsystems’ founders, has also been part of successes like AtHome, Juniper Networks, Redback Networks, and Siara Systems. One of the general partners at the venture capital firm Kleiner, Perkins, Caufield, and Byers, he personifies what is good with the Silicon Valley model.

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According to data available from Ipo.com, even now, about $100 million a day is being invested in private companies in the US. VCs (Venture Companies) make these investments based on analysis of the idea, the founders’ background, and their own expectation of return. Typically, three out of 10 ideas or companies succeed (the rest simply die). But, this has fueled research and development, creating new technologies and wealth.

During the boom days of the last two to three years, the fundamentals were forgotten. Business basics about growth and profits were questioned in favor of new business models based on customer eyeballs, page hits, and customer acquisition. Models were created in plenty to justify high valuations. If a company was successful, many copycats emerged and they all got funded.

Also, many new funds got started and were managed by inexperienced people. High levels of funding cramped support services and infrastructure needed by the startups.

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When a company gets funding in its early stages of growth, money is spent in creating a product or service, hiring, setting up the infrastructure, and creating a sales and marketing engine. As soon as there is predictability of revenues and a management structure in place, an IPO is done and the VCs cash in on their investments. Typically, the time taken for an IPO is two to five years from the start. In the last two years, expectations changed, with companies trying to go for an IPO within the first year. This was often based on unrealistic assumptions.

A lot of value was created, and lost, on paper. Unfortunately, lots of real money was also lost by the investors–something which will not be forgotten and is sure to keep the valuations depressed in the immediate future.

Also many of the investments in high technology were in creating network infrastructure. This fueled the growth of the telecommunications industry. Many new technologies got funded in the hope that the bandwidth requirement would grow exponentially. But some of the new technologies allowed increased bandwidth to be carried by the existing backbone, thereby eliminating the need for new infrastructure build-up. When the Internet startups went out of business, the need for new bandwidth came down further.

The Silicon Valley model is good and much needed to create new innovations and technologies, and hence new companies. But in the last two years, some of the basics were forgotten and lead to the downturn. Hopefully, the lessons will not be forgotten.

S Gopalakrishnan is the deputy managing director of

Infosys Technologies. The views expressed here are the 



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