Flexible Re-Cycling and High-Technology Entrepreneurship

Homa Bahrami; Stuart Evans

doi:10.2307/41165799

journal article Apr 01, 1995

Flexible Re-Cycling and High-Technology Entrepreneurship

Homa Bahrami Stuart Evans

California Management Review Vol. 37 No. 3 pp. 62-89 · SAGE Publications

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References

76

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This is reflected in the comments of a high-tech executive on changes in the disk drive industry: “Less than a year ago the 20 Megabytes (MB), 2.5” disk drive was the standard product. It has since moved to 40, and 60, and now 80 MB. The most desirable product for the marketplace has basically gone through 3 to 4 product generations in the last 12 months” Leisy Roger, Director of Sales, PrairieTek Corp., Electronic Buyers' News, September 21, 1991, p. 14.

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By 1993, some 18 firms had achieved revenues in excess of $1 billion, and overall approximately 1/4 million jobs and 2,150 high-technology companies have been created in Valley Silicon. San Jose Business Journal, November 30, 1992, p. 6.

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According to the Center for the Continuing Study of California, California Employment Development Department (1991), Valley's Silicon employment profile comprised 69,900 jobs in business services, 67,400 in electrical components, 57,500 jobs in the computer sector, 31,300 in electronic instruments, 31,300 in information and software, 18,100 in communications, and 5,800 in biotechnology.

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Well-known firms which have been discontinued include Visicorp, the spreadsheet software pioneer; Osbourne Computer, which pioneered the portable computer; Xebec, the developer of I/O controllers; and Momenta, the first pen-based computer company.

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Their “ephemeral” nature does not imply the dissolution of all their know-how and intellectual capital. In the disk drive controller industry, for example, the demise of Xebec had a positive impact on the growth of Cirrus Logic, as did the disengagement of Scientific Microsystems, which led to the resurrection of SuperMac Technologies as an independent firm.

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One of the driving forces underscoring these extraordinarily high growth rates is the structure of Venture Capitalist's limited partnerships which typically last for 7 years. In order to show a return to the shareholders, investors need to liquidate their positions within the time frame specified by the limited partnership. Therefore, the exit strategy of a portfolio company, an initial public offering or an acquisition by another firm, needs to be orchestrated within this time frame, so that the proceeds can be shared among the partners and the investors. A general rule of thumb applied by Venture Capitalist's is to evaluate a deal on the basis of achieving 5 times the value of their initial investment in 3 years or 10 times in 5 years. These rates of return may appear to be abnormally high, but when, as a rule of thumb, 1 in 20 firms actually getting off the ground and even fewer going public, they can provide part of the motivation behind rapid growth. Venture Capitalist's often hedge their bets by investing in several firms vying for dominance in any given arena. Even the most seasoned venture capitalists may be unable to spot winners early on—as witnessed by their initially unfavorable reactions to ROLM, Seagate, and Adaptec, among many other successful ventures, or indeed their favorable disposition towards Plexus, Momenta, and EO.

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The U.S. disk drive industry is dominant in merchant production, although much of its manufacturing is conducted offshore, particularly in Singapore, Malaysia, and Thailand, or in conjunction with Japanese partners. The industry remains vibrant, as attested by the sustained growth rates and the pace of innovative new product development.

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When the disk drive company, Seagate, was founded by Shugart Alan in 1979, venture capitalists were not initially very interested; private investors—including Dion Norman, the founder of Dyson, and later TI and Compaq's Rod Canion provided the seed money to get the firm off the ground. Later, when Finis Conner wanted to start a new disk drive firm, at a time when that business was out of favor at Sand Hill Circle (where many venture capitalists were based), Canion again stepped in and made an investment whose pay-off was substantial. Boucher Larry and his co-founders took their initial business plan for starting Adaptec, the input/output controller company, to venture capitalists in vain. They mortgaged their houses in order to build a prototype of the product before venture capitalists invested in the company. Similarly, ROLM's founding team initially sought venture capital backing without much success. Each of the four founders invested $15,000 in the business, before Jack Melchor—one of Silicon valley's early venture capitalists—agreed to become a fifth founder by investing $15,000, and guaranteeing a bank line of credit for $ 100,000 in order to get the firm off the ground.

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In recent years, many firms including 3Com, Sun Microsystems, Silicon Graphics. Conner Peripherals, and Syntex have built campus-like settings in order to generate a community spirit and to facilitate inter-group communication and interaction.

[35]

Well-known examples include Italians (Frederico Fagin, co-founder of Synaptics and Zilog, Giacomo Marini co-founder of Logitech), French (Jean Louis Gassee, formerly of Apple, and Phillipe Kahn of Borland), British (Will Corrigan of LSI Logic, Dick Moley of Stratacom), Chinese (David Lee of Qume), Hungarian (Andy Grove and Les Vadacz of Intel), Indian (Juggy Tandon of Tandon), German (Michael Spindler of Apple Computer), Iranian (Kamran Elahian of Cirrus Logic and Momenta), Israeli (Arich Feingold, the co-founder of Daisy Systems), and other nationalities.

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Interestingly, Massaro Don, who replaced Alan Shugart as President of Shugart, became VP of Marketing at Conner Peripherals, after co-founding Metaphor Computers with Dave Liddell, co-inventor of Ethernet at Xerox PARC.

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A good case in point is Gordon Campbell, the founder of SEEQ Technology, who after leaving SEEQ went on to found Chips and Technologies. C&T managed to become one of the fastest growing technology companies during the late 1980s. Similarly, Al Shugart—after leaving Shugart Associates—went on to found the successful Seagate Technology, the pioneer of 5.25” Winchester disk drives.

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See, for example. General Magic and 3DO as recent examples.

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McNeally Scott described how Sun Microsystems's organization overcomes this problem by being both “aligned yet loosely couple.” See “Interview with Scott McNeally, Upside Magazine (March 1993).

[50]

This phenomenon is clearly observed in the disk drive industry. Over the last decade or so, the firms which have dominated the market for a particular “form factor” (the technical term for the size of the drive—which has evolved in ten years from 8 to 5.25 to 3.5 to 2.5 and recently to 1.8 inches) typically have been late to market with the next generation device. For example, Seagate, the pioneer of 5.25 inch Winchester disk drives (which grew at a tremendous pace during the early 1980s with the rapid take-off of the personal computer market), initially failed to capitalize on the emerging opportunities presented by 3.5 inch disk drives destined for the portable computer market. However, Conner Peripherals—a new start-up founded in 1986 by Conner Finis, a Seagate co-founder and former senior executive—became a major success story in the late 1980s by developing the 3.5 inch disk drive. Earlier, Quantum Corporation had a difficult time making the transition from the 8 inch line, of which it was a pioneer, to the 5.25 inch Winchester drives, which became a standard in the PC era. The firm learned valuable lessons from this experience and quickly became a substantial force in the emerging 3.5 inch form factor in the late 1980s. See Bower J.L., Christensen CM. “Disruptive Technologies: Catching the Wave,” Harvard Business Review, (January/February 1995).

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Published: Apr 01, 1995
Vol/Issue: 37(3)
Pages: 62-89
License: View

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Cite This Article

Homa Bahrami, Stuart Evans (1995). Flexible Re-Cycling and High-Technology Entrepreneurship. California Management Review, 37(3), 62-89. https://doi.org/10.2307/41165799

Flexible Re-Cycling and High-Technology Entrepreneurship

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