INC.: But they could be great little companies!
ROSEN: Oh, yes. There's a class of companies that can be outstandingly successful in every measure except one -- and that's size. We want our companies to be large enough to be able to go public. We need the public valuation and the public liquidity to sell our holdings. We're not for everybody.
INC.: Public valuation also establishes personal net worth, and some of it is staggering. What are your thoughts about, say, Bill Gates's becoming a billionaire just because his Microsoft stock went from $21 to $121?
ROSEN: I think it's absolutely terrific. He's one of the two or three most significant individuals in terms of creating the fastest-growing industry in history. Shouldn't he be rewarded for his pioneering?
INC.: A billion dollars' worth?
ROSEN: There are any number of billionaires in the country, but how many have contributed one fraction as much to productivity, to innovation, to job creation, as Bill Gates?
INC.: Who else do you consider a major pioneer -- Steve Jobs?
ROSEN: Absolutely. A couple more are Dan Bricklin and Bob Frankston, inventors of VisiCalc, the software product that helped launch the personal-computer revolution.
INC.: Would you invest in Jobs the second time around -- in NeXT?
ROSEN: NeXT is a high-ticket investment. It's an example of a successful entrepreneur going back for a second start-up, and the valuation goes way up. When you have to make an initial investment of $10 million or $20 million, it's hard to get big returns.
INC.: Might this rollover of successful entrepreneurs into second start-ups -- Bill Poduska, Allen Michels, Steve Jobs, and some others -- mark a new trend in venture capital?
ROSEN: I think it's small. What happens is the second-timers get publicity merely because they've done it before.
INC.: What has been the most significant change in your industry since '81?
ROSEN: Today, the most active investors in funds are Japanese.
INC.: Do you think that's a positive factor?
ROSEN: To the extent that they help entrepreneurial companies, it's positive; to the extent that technology flows from the United States to Japan, it's not. I'd certainly like to see more active participation by U.S. entities than by foreign entities.
INC.: Has native entrepreneurism itself undergone a change? When INC. was started -- at about the same time as Apple -- founders were better at building garages than businesses.
ROSEN: They're more savvy, mostly because now there are many role models to learn from. They're familiar with the different venture capital firms. And they read INC. and other business publications. All in all, negotiations are more sophisticated.
INC.: With the result that venture capital is giving something away?
ROSEN: Not really. Prices haven't changed much at the start-up level. But it may mean that venture firms can't steal deals where maybe they once did. . . . I'm not saying we ever stole a deal.
INC.: Of course not. But speaking of stealing, are hostile takeovers becoming a factor, now that small technology companies are maturing?
ROSEN: They haven't been a big factor. The few that have occurred were such disasters that they made thinking of a hostile takeover an even worse prospect. Takeover people look for predictable and high cash flow, low valuations, and assets that can be disposed of. Technology companies tend to have high valuations relative to book, little in the way of physical assets that can be disposed of, and unpredictable cash flows. So I think that they're safe.
INC.: In a similar vein, do you ever make aggressive sales pitches to try to woo a hot start-up -- such as Sun Microsystems or MIPS Computer Systems -- away from the competition?
ROSEN: Some firms do, but we don't. We want people to want us. In those companies' cases, they didn't know us and we didn't know them. There are good venture firms beside Sevin Rosen. I know, because I'm involved in investing for Caltech, which puts 2% of its endowment into venture firms.
INC.: They speculate with their endowment?
ROSEN: It's not speculation. In any individual venture investment the risk is high, but in a diversified group of partnerships that in turn invest in a diversified group of companies, the risk is reduced substantially, to the point at which it's an appropriate investment for a nonprofit organization.
INC.: Is Sevin Rosen itself doing anything different now from nine years ago?
ROSEN: We're focusing more heavily on incubating. Our main office is in Dallas, where we attract likely entrepreneurs and help them start their businesses. We think that the most added value and the highest reward comes at that pre-start-up level. Kleiner Perkins was the pioneer. It started both Tandem Computers and Genentech as incubated companies. We did the same with Cypress Semiconductor and Convex Computer.
INC.: But at what cost? When executives and engineers are lured from another company to take part in an incubator scheme, they leave that company in a weakened state. Principals jumped from Intel and National Semiconductor, for example, to start their own venture-inspired businesses.
ROSEN: Wait a minute! Where did Intel and National Semiconductor come from -- a vacuum? Intel itself was built by a group who spun out of Fairchild; so was National Semi. It's a continuum that has gone on for quite a while. And rather than weaken the parent company, it actually strengthens it. Intel is much stronger today because it had competition not only from the Japanese, but from latter-day Intels.
