BY DAVID SPEAKMAN
The last time federal regulators changed media ownership rules, a slew of deals altered the local television landscape.
Now regulators are looking into further changes that affect both TV and newspapers. Those proposals face opposition from such strange bedfellows as lobbyist groups the National Rifle Association and the National Organization for Women.
In the cross hairs is a Federal Communications Commission meeting June 2, at which commissioners will decide whether or not to relax rules governing consolidation among companies that own TV stations and newspapers in the same cities.
Under U.S. law, only an act of Congress or a federal court decision can overide the FCC in these matters.
Among the proposals are the following changes:

  •  Eliminate a regulation that bans the same company from owning both a newspaper and a TV station in the same market.
  •  Allow the same company to own as many as three TV stations in the same city.
  •  Allow big networks to buy one another.
  •  Increase the number of TV stations a single company can own.

The five-member FCC commission, which is controlled by three Republicans who usually vote in a bloc, is expected to support the drastic easing of many regulations.
According to a March 13 Standard & Poors research paper, broadcast companies already are strategizing mergers and acquisitions to take advantage of changes.
S&P says it expects any easing of regulations by the FCC could “fuel [a] transaction flurry” among media companies.
“Despite a lot of campaigning by … public interest groups, it looks like this thing is going to go through,” says TV analyst Rick Ellis of AllYourTV.com. “Although I think it’s going to be a short-term upside for a lot of shareholders in midsize broadcasting stocks, in the long term, I don’t think it’s going to be good for these companies.”
He says consolidation has been unsuccessful for AOL Time Warner Inc. and Walt Disney Co.
Other major media players are not looking to take advantage of opportunities from proposed FCC rules changes.
“From the newspaper side, you’re already starting to see some of the newspaper groups saying they aren’t so sure they’re going to get into TV because the stations are considered to be very over priced,” Ellis says.
The largest Bay Area-based media company agrees.
“We have no interest in owning TV stations,” says Polk Lafoon, spokesman for Knight-Ridder Inc. of San Jose, the second-largest newspaper publisher in the nation.
Locally, the company publishes the San Jose Mercury News and Contra Costa Times.
The National Association of Broadcasters, a Washington, D.C.-based lobbying group that represents most corporations that own TV stations, says it backs any changes that ease media ownership restrictions.
The biggest changes could come from consolidation of TV ownership in a single market.
The Bay Area already has seen some consolidation since 1999 when after a local test case, the FCC first allowed so-called “duopolies” where one company can own two stations at the same time.
At the time, Granite Broadcasting Corp. of New York, then-owner of KNTV Channel 11 in San Jose, wanted to buy Channel 20 of San Francisco. Officials from Granite, along with the owners of the other major Bay Area TV stations, declined to be interviewed for this story.
Since that time there has been a domino effect of station ownership swaps and now the Bay Area has four duopolies (see box).
Under the proposed changes, things could change even more.
“You could have NBC and ABC owned by General Electric Co.,” says Chellie Pingree, president of Washington D.C.-based Common Cause. “If you don’t have a diversity of media ownership, there are fewer voices being represented, there is far less localism.”
Potential lack of diversity in local voices on both ends of the political spectrum has conservatives joining liberal groups in a chorus of opposition.
“When the NRA and NOW are on the same side of this issue, that tells you something. Either the planet has spun off its axis, or we’re right about this one,” Pingree says.

BY DAVID SPEAKMAN
Despite higher sales forecasts, both corporate and analyst opinion is that a recovery in the desktop personal computer market may not happen this year or any time in the foreseeable future.
Gartner, a research firm, predicts worldwide PC sales in 2003 will grow 6.6 percent over 2002, keeping slightly ahead of global inflation rates.
And according to research firm ARS Inc., when businesses are buying, they are buying on the cheap. ARS research shows that for the same amount of money spent in 2001, companies can now buy a PC that is more than twice as fast and has four times the memory and almost four times the hard disk space.
Silicon Valley’s largest PC maker, Hewlett-Packard Co. of Palo Alto, says its PC unit is among its poorest performing businesses.
“Looking ahead we see stronger demand for notebooks versus desktop PCs, reflecting a shift toward mobility and the attractiveness of richly featured notebooks as desktop replacements,” HP CEO Carly Fiorina said in a May 20 conference call to analysts. “In the enterprise market overall, IT spending remains muted and there are no signs of a large-scale PC refresh cycle taking hold.”
Those comments did not go unnoticed on Wall Street, where analysts reflected upon corporate focus on return on investment (ROI) in technology spending.
“This is in line with our view that a fundamental change in the customer base to more ROI-sensitive, traditional corporations makes it unlikely that there will be significant spikes in PC demand as there have been in the past,” wrote Bill Shope, a New York-based analyst with JP Morgan Securities Inc., in a May 21 research note. “Overall, HP’s cautious comments on PC demand suggest that a broad recovery is unlikely to be a 2003 event. In addition, we believe that enterprise spending on servers is likely to be relatively stronger than PC spending throughout the rest of the year.”
Shope declined further comment. JP Morgan engages in investment banking for HP.
Desktop PC analyst Toni Duboise with ARS says with shrinking profit margins, PC makers continue to shrink away from the desktop.
“Absolutely. That’s why you have all of your major PC manufacturers focused beyond the box. This is no secret,” she says. “They are not making money on PCs anymore and they haven’t been making money on PCs for some time. That’s why they are investing in services and selling accessories. While we are in a beleaguered market and having economic woes, the real story here is that it is a PC buyers market.”

BY DAVID SPEAKMAN
Hopes of a major turnaround this year in the Bay Area’s once-thriving venture capital industry are not looking good.
A new report by Ernst & Young LLC’s venture capital advisory group shows last year both VC investments and valuations of startup companies fell to levels not seen since the mid-1990s.
But that doesn’t mean the VC industry is the same as it was back then.
Bill Reichert, president of Menlo Park-based Garage Technology Ventures disagrees with opinions that venture capital is at levels similar to 1995 or 1996.
“Both you and I know we’re not where we were in the mid-1990s. There is a huge difference between the absolute level of activity and the direction of activity. Clearly the fact [is that] the direction of VC investing is dramatically different and that means the whole environment is different,” Reichert says.
“Another big difference is that there were investment theses back then that people held on to fairly confidently and the problem is there is no investment theory that anybody is holding on to with any confidence whatsoever,” he says.
Ernst & Young says the VC industry will need an outside influence to act as jumper cables to get its engine running again — possibly the reemergence of the initial public offering market or a new emergence of a successful business model.
In the aftermath of the dot-com bubble, E&Y says the VC industry still hasn’t established a firm footing although there is an understanding with VCs that the industry needs to change.
Garage’s Reichert says some VC investors may sound confident about their industry, but that they are trained to do so, and it doesn’t reflect the real world.
“The reality is there is a huge lack of imagination, vision and confidence that there is any reasonable and solid investment thesis. Often you hear VCs are balancing their approach. That means instead of chasing after early stage deals, they’ve decided to go after deals that are generating revenues and are close to break-even,” Reichert says, explaining VCs increasingly will mix both kinds of investments.
He says investment strategy for many VCs has reversed their usual mode of operation as they no longer compete to be the first to invest in a startup.
“‘Last money in’ is the new investment thesis that you’re hearing a lot of,” Reichert says.
Some say early-stage investors have been burned too many times as they lose money when startup valuations at second- and third-round fundings fall.
“That’s been going on for a couple of years now. It’s not a new trend, but I don’t know how much longer you can have down rounds,” says Deepak Kamra, general partner at Canaan Partners in Menlo Park.
“Nobody invests in a first round thinking the company will be cheaper in the second round,” Kamra says.
“First rounds are dropping in both price and quality. Am I seeing a change in that? No,” he says.
Garage’s Reichert agrees.
“Very few [VCs] are willing to say they’ve abandoned early-stage companies. But practically speaking, there are a number who have.” he says.
There were 510 initial financings of startups in 2002, the lowest number in seven years, according to research by Ernst & Young and VentureOne. The silver lining is that 83 percent of that first-round money went to IT and bioscience startups, industries the Bay Area dominates.
The lower level of initial financings doesn’t concern one investment banker.
“You had more companies funded in the past than probably should have been,” says Rick Osgood, CEO of Pacific growth Equities Inc. of San Francisco.
He says the current crop of new startups will probably be more healthy than those funded during the boom years.
Garage’s Reichert says in the current market, huge VC fundings reliant upon billion-dollar IPOs will likely be replaced by a larger number of small deals, which still can provide reasonable returns on VC investment.
“Maybe that’s whistling past the graveyard, but that’s clearly what all of us are betting on,” he says.

Ask Jeeves Inc. (Nasdaq: ASKJ) of Emeryville inked a deal May 28 to sell its search software unit, Jeeves Solutions, to privately held Kanisa Inc. of Cupertino.
Under terms of the deal, Kanisa will pay Ask Jeeves $3.5 million in cash and a promissory note worth $750,000.
Ask Jeeves says this move will allow it to spend more money on marketing and to focus on its core business, enterprise search, which made up 86 percent of the $25.2 million in sales it reported in the quarter ended March 31.
Kanisa says it will fold Jeeves Solutions operations, including some if its staff, into its existing customer service software offerings.
“The JeevesOne product is extremely strong and we look forward to working with the Jeeves Solutions team to serve the customer service needs of existing and new customers,” Kanisa CEO Bruce Armstrong said in a statement.
Both companies expect the acquisition to close by the end of July.

Fremont VC strives for equitable equity

BY DAVID SPEAKMAN
For the past three decades Opportunity Capital Partners in Fremont has quietly been tearing down financial barriers and recently received top honors from Black Enterprise magazine.
In its annual report, New York-based Black Enterprise magazine recently recognized Opportunity Partners as one of the top 10 private equity firms headed by an African American partner.
“The reason for this list is to give an indicator of a segment of African American business,” says Derek Dingle, executive editor of Black Enterprise.
“Two years ago we decided to expand our listings to include private equity firms because we thought it was important to look at those companies that are actively investing in businesses. Many of the firms that we’ve identified invest in minority-owned businesses,” he says.
Opportunity, which has $135 million under management, is not an average run-of-the-Sand-Hill-Road VC firm.
“Our philosophies share more similarities than differences; we both are in the business of providing capital to entrepreneurs in a fashion that will allow us to realize returns that our partners will find attractive. There is no difference there,” says Peter Thompson, managing partner of Opportunity.
“The primary difference between us and a ‘general’ market fund primarily has to do with the marketplace focus. Our focus is entrepreneurs of color and women,” he says.
Opportunity’s portfolio, which has funded dozens of startups over the past 32 years, is primarily focused on information technology, communications and health care, but includes few household names.
Its current portfolio companies include antispam software maker BrightMail Inc. of San Francisco, biosciences company BioGenex Laboratories Inc. of San Ramon and plastic dog house maker, Dogloo Inc. of San Francisco.
“Most of the companies we finance do not become public market candidates, so for a good portion of the world, those names are never known,” says Thompson. Most of his companies end up being bought.
Not all ethnic minorities have trouble getting funding, as can be seen by the large number of well-funded Bay Area startups headed by Asian and Indian entrepreneurs.
But Susan Hailey, CEO of San Mateo-based Forum for Women Entrepreneurs (FWE), says women and other groups still have a long way to go to achieve equitable equity.
“Our organization was founded in 1993 based on a study that said something like 5 percent or less of venture capital went to women,” Hailey says.
Despite U.S. Census figures that show women own or co-own almost 40 percent of all U.S. businesses and the number of black-owned companies grew by more than 30 percent in the last decade, African American and women-owned startups each were awarded less than 5 percent of all VC money distributed in 2000, according to VentureOne.
“Women entrepreneurs needed to be educated in not only how to ask for money, but what it takes — what a fundable business looks like,” FWE’s Hailey says.
Opportunity’s Thompson says even in today’s more enlightened business climate, women and ethnic minorities still face additional hurdles to get access to capital.
“There are still roadblocks that result from perceptions from those that are in the position to make decisions as to how capital is allocated,” Thompson says.
“On the other hand, I think that increasingly as there are more instances and more evidence of women and people of color ascending to positions of responsibility and authority within corporate America, the reasonable and objective observer will be less inclined to think that there is a distinction to be made on color or gender,” Thompson says.
Opportunity traces its heritage back to 1970 when Richard Nixon was president and promoted “black capitalism”to fight poverty.
Back then two Bay Area companies, Bank of America Corp. and Standard Oil Co. (now ChevronTexaco Corp.) gathered a group of investors to start the Opportunity fund to target black entrepreneurs.
Thompson says he’s been with Opportunity since it opened in 1971.
“At that time there was really no organized source of venture capital for entrepreneurs of color in the Bay Area,” Thompson says.
Recognizing the dearth of women-owned business, Opportunity expanded its focus to include gender parity in funding.
“Talented entrepreneurs come in all colors and genders. It’s just that women and certain ethnic minorities have been under served and overlooked by the general market funds,” he says.
David Sheldon, CFO of BioGenex, says Opportunity is actively involved as an advisor to his company.
“They look at companies for more than one reason. They look for return on investment but they also consider, like their name suggests, the kinds of opportunities that are being generated by the company. For instance this firm was founded by immigrants and it has quite a mix of people from different ethnic backgrounds,” Sheldon says.
But for startups, getting past the initial funding barrier is sometimes the hardest part.
“Anywhere, if you’re not part of the established network, it’s hard to break in — in Silicon Valley it’s really hard to break in,” says the Forum for Women Entrepreneurs’ Hailey.
Black Enterprise says venture firms like Opportunity are more than mere VCs; they are examples to others.
“I think it’s a very important development in terms of giving minority-owned businesses access to equity capital so they can grow and eventually go public when the IPO market turns around,” BE’s Dingle says.
Opportunity’s Thompson agrees.
“I think we validate the fact that it is possible to achieve attractive results from providing financing to entrepreneurs who are people of color or women,” Thompson says.
He says in the three decades he’s been watching the business world, a woman, Carly Fiorina, was named to head Hewlett-Packard Co. of Palo Alto and Richard Parsons, a black man, is now CEO of AOL Time Warner Inc. of New York.
“With AOL or HP, you don’t think that those two people in particular were promoted to those positions because of an affirmative action quota.”
“It was all about money,” he says.

Banks diversify products and services to offset decline in deposits from dearth of venture capital

BY DAVID SPEAKMAN
You would think that with

venture capital funding falling precipitously during the past two years, banks would be giddy about the opportunity to jump in and fill the void. But truth be told, banks have been hurt from the parched flow of cash trickling into their deposit accounts.
A new study to be released after Memorial Day by financial auditing and research giant Ernst & Young LLP shows venture funding nationally falling 80 percent since 2000. And with fewer VC dollars funding startups, bank deposits also have fallen.
Deposit levels are important because banks make profits by charging banking fees. Deposit levels also are used by regulators to set the maximum amount any bank is allowed to loan to its customers.
“It’s a tough time for bankers these days and it’s forced commercial bankers to look upmarket at companies that are more established and in some cases these companies are already public,” says Stephane Dupont, group leader of Ernst & Young’s Bay Area-based Capital Advisory Group.
One of the companies changing with the times is Silicon Valley Bank of Santa Clara.
“Our strategy over the last couple of years has been to refine our focus so that we’re dealing with high-technology companies, life sciences and ultra-premium wineries and private banking of individuals who are in those markets,” says Marc Verissimo, chief strategy and risk officer at Silicon Valley Bank (Nasdaq:SIVB). “We are expanding our services to all technology companies, including those that are privately held and not venture-capital backed as well as public companies.”
Comerica Bank-California is a San Jose-based subsidiary of Comerica Bank (NTSE:CMA) of Detroit and is Silicon Valley Bank’s largest competitor in attracting VC-funded deposits.
“Venture capital funding is back to levels that we think are more sustainable,” says Jim Ellison, Comerica’s managing director of its venture capital operations. “We actually have not seen any real decline in our deposit base. I think that we’ve actually seen our deposits steadily grow.”
Ellison acknowledges a slight decline in VC deposits in 2001, but says overall deposits grew again from 2001 to 2002.
Ellison says with $53 billion in assets under management, Comerica has the ability to withstand short-term deposit losses.
Silicon Valley Bank, with less than $4 billion in assets, has little choice but to expand beyond VC-backed startups.
According to a forthcoming Ernst & Young report on 2002 venture capital, $19.4 billion in venture capital was dispersed in 2,056 rounds of funding last year.
That’s down from 3,034 rounds worth $34.6 billion in 2001 and $93.8 billion in VC funding in 6,101 rounds during the height of the market in 2000.
With its large exposure to VC-backed startups, Silicon Valley Bank saw its total asset levels steadily decline from 2000 and saw a bottoming out last year when deposits fell below $3 billion before recovering by year end.
“We avoided the dot-com boom as far as lending money, although we certainly took deposits from dot-coms and probably lost about $2 billion in deposits when those companies went away,” says Silicon Valley Bank’s Verissimo.
According to the latest report from the National Venture Capital Association, funding for the first quarter of 2003 was $3.8 billion nationwide, down from $4.3 billion in the previous quarter.
“Still, that’s a significant amount,” says RBC Capital Markets analyst Joe Morford of San Francisco.
RBC makes a market in Silicon Valley Bank stock and managed a public offering for the company in the past year.
“That’s where we were back in 1997 and while it’s certainly off the peak in early 2000, it’s a significant amount of money that’s being put to work each quarter,” he says.
Still, with a smaller VC market, banks look to innovation to grow in other ways.
“One interesting solution at Silicon Valley Bank is that they added services to their portfolio. They added an asset manager and they also added mergers and acquisitions services,” says E&Y’s Dupont.
Silicon Valley Bank says that’s been a key to their turnaround.
“About a year and a half ago we acquired Alliant [Partners of Palo Alto], which was a boutique mergers and acquisitions firm focused on the technology marketplace. That’s been very successful for us,” says Silicon Valley Bank’s Verissimo.
“In the Bay Area they used to have the four horsemen in Hambrecht & Quist, Montgomery, Robertson Stephens and Alex. Brown,” he says. “But they were all acquired by larger entities and their focus on the middle market has gone away,” Verissimo says.
Silicon Valley Bank also added Woodside Asset Management to its stable last year, adding private banking services to its portfolio.
“Our number of clients has remained flat even though the market has shrunk quite a bit. As for VC-backed companies, we’ve gained market share in that market plus we’ve been able to add non-VC-backed and public clients” Verissimo says.
At least one analyst says that strategy is paying off.
“I think Silicon Valley Bank has been able to hold their own through a combination of expanding market share as many of the other players have pulled back or gotten out of the business altogether,” says RBC’s Morford.
But don’t expect venture capital to be forgotten by banks.
“We’re not turning our back on VC-backed companies; it’s still a primary focus,” says Silicon Valley Bank’s Verissimo.
“Over the past couple of years, we’ve seen almost every other commercial bank get out of the business as far as actively doing this,” he says. “I’ve been doing this for 22 years and it’s a pattern that when times get tough, usually you have a smaller pie and not as many hands will reach in. The nice thing is you tend to lose a lot of competitors.”
“At the end of the day we are absolutely committed to venture capital; we believe that over time this will continue to be a driver in the American economy,” says Verissimo.

By DAVID SPEAKMAN

Sometimes small steps are the best way to get you where you want to go.

Making good on its promise to grow through small acquisitions in existing markets (see Biz Ink, April 18) San Fransico-based Wells Fargo & Co. (NYSE:WFC) says it will buy Pacific Northwest Bancorp (NASD:PNWB).

The all-stock deal, worth $590 million, will add 53 branches and $3 billion in assets to Wells Fargo, making it the fourth-largest bank in Washington state with slightly less than 7 percent of the market. Wells has 14.5 percent of the California market, where it ranks as the second-largest bank behind Bank of America Corp. of Charlotte, N.C.

This so-called “fill-in” buying allows Wells Fargo to give itself a bigger slice of the banking pie in markets where is it relatively weak.

“We grow our store distribution system in two ways — de novos [opening new branches] and strategic acquisitions,” says Wendy Grover, spokeswoman for Wells Fargo.

She says strategic acquisitions either take the form of “fill-ins” or extending its territory into markets that border existing Wells Fargo territory.

“The two methods are complimentary,” she says.

In general, Wall Street analysts see this as a positive move.

“Wells has been opportunistic with acquisitions and particularly has been looking to fill-in their franchise or enhance their presence in markets with above average growth prospects,” says RBC Capital Markets San Francisco-based financial services analyst Joe Morford.

RBC does not have an investment banking relationship with Wells Fargo.

“They already have a presence in Washington which, relative to Wells Fargo, is a smaller share than they have in other states,” he says.

Even though Washington state is suffering from the same dot-com bust economy as Northern California, Morford says Wells sees that market as a growth opportunity.

“So, this is a longer term investment; it’s still a good place to be. And here’s an opportunity to pick up $3 billion in assets and another 53 branches for what they consider a reasonable price.” Morford says.

That reasonable price of $590 million comes out to $35 a share for Pacific Northwest — a 23 percent premium over its $28.44 stock price at Monday’s close according to a May 20 research report from San Francisco-based Friedman Billings Ramsey & Co. Inc.

FBR says that’s a higher premium than other bank mergers in recent months, which average about 12 percent over market capitalization.

Since Wells can eliminate management and some back-end operations in the long run, it can afford the higher price tag, says RBC’s Morford.

“Fill-ins are the easiest transactions to do and carry the lowest risk and they are able to pay more for the banks because of synergies that they can realize,” he says.

But Morford will not rule out Wells being involved in a future big-ticket merger to expand its territorial footprint, which currently stops in the Fort Wayne, Ind. market, further toward the east coast.

Some analysts think Wells should target a big southeastern regional bank like SunTrust Banks Inc. of Atlanta.

“These rumors come up from time to time, but the price would have to be right before Wells would bite,” Morford says.

Even though the valley’s startups are getting less money, some banks are still profiting from those uninvested funds.

Although venture capital funds continue to be flush with money, startup funding nationwide in 2002 was less than $20 billion dollars, down from $34.6 billion in 2001.

Analysts say no matter how money is spent or not spent, some bank out there is either holding it as a deposit or earning money from it.

“A favorite adage of Dick Kovacevich [CEO of Wells Fargo Bank] is, ‘Money never goes away, it just changes form.'” says Craig Woker, banking analyst with Morningstar research.

When it comes to venture capital funds, size can be deceiving since the firm probably doesn’t draw the full amount from investors in one sum.

When a VC fund raises capital, it rarely gets cash upfront. Instead the VC gets contractual commitments from investors — limited partners comprised typically of university endowments, insurance companies and state pension funds.

“VCs call upon their limited partners to draw down [funds],” says Stephane Dupont, a Bay Area-based group leader at Ernst & Young’s venture capital advisory group.

“The limited partners are either institutional investors or they are wealthy individuals. These people will prefer to have regular, but not frequent, calls for capital,” Dupont says.

Until those calls are made, those VC partner funds are usually kept in a semi-liquid form, which can easily be converted into cash — usually as some form of bank deposit.

The bank, in turn, leverages those unspent VC deposits to finance loans or other business ventures.

“Some bank is getting the money as a deposit, even if startups don’t get funded,” Morningstar’s Woker says. “The money has to be somewhere. It’s either at the venture capital firms themselves or else their partners are holding the money.”

BY DAVID SPEAKMAN

After years of red ink, technology hardware is showing signs of recovery.

A new report by Emeryville-based information technology researcher Techtel Corp. says server sales improved in the first quarter of 2003, while sales of personal computers are still sluggish.

“The good news is that the IT sector managed to get through a challenging quarter intact,” says Michael Kelly, CEO of Techtel.

According to Techtel’s research index, the first quarter of 2003 showed an 11 percent increase in spending on servers and other high-end IT hardware for the first time since the end of 2001.

Techtel’s numbers for desktop personal computers are not as encouraging, showing a 9 percent fall in sales from last year.

“After 9/11, we saw a shift to low-end categories as companies moved IT spending to low-risk … categories such as PCs and notebooks. This is the first quarter [since then] where the more expensive stuff is being purchased,” Kelly says. “While this does not yet establish a trend, it does suggest that underlying economic improvements are beginning to shore up IT investment.”

The Techtel report is at odds with a recent Goldman Sachs survey of the 100 largest IT buyers worldwide, which suggests IT spending should fall 3.2 percent in 2003.

New York-based Goldman analyst Rick Sherlund says the recent projection is a drop from a February report, which predicted IT spending growth of 1 percent this year.

He says most large IT buyers have given up on an economic recovery for the second half of 2003.

Techtel agrees that IT spending at larger companies will remain under pressure, saying much of the growth is coming from smaller companies with fewer than 250 employees, where 25 percent say they plan to increase IT spending this year because of pent-up demand.

Warren Mootrey, a director of marketing at Santa Clara-based Sun Microsystems Inc., the No. 4 server maker worldwide, says the trend goes beyond just small business.

Instead of buying big box servers with multiple functions, companies are leaning towards horizontal clusters of servers, which are smaller and cheaper.

“IT spending is picking up not so much with smaller company demand, but with horizontal computing in general. A lot of companies view it as buying lower-cost [server] boxes,” Mootrey says.

He says companies are basically looking to get more bang for their bucks.

San Francisco-based antispam startup Brightmail Inc., which employs slightly more than 100 workers, agrees things have changed.

“Three years ago what you saw were negative inventory levels from the hardware makers so, as a result, we had to pay list price or sometimes a premium for hardware in order to secure the products we needed,” says Brightmail CFO Mike Irwin.

But the dot-com bust and a number of high-tech bankruptcies change the hardware climate.

“That hardware shortage turned into the current glut and now you have a lot of second-hand equipment on the market so prices have dropped significantly,” Irwin says.

Brightmail also avoids another practice common to the dot-com boom — signing an exclusive contract with a hardware provider.

“We maintain relationships with multiple vendors. That way we can keep everyone honest,” Irwin says.

Companies also are making fewer speculative purchases.

“We so overbought our hardware in 1999 and 2000 and ended up with way more than we needed,” says Manjal Shah, CEO of online auction software seller Andale Inc. of Mountain View which employs 140 workers.

“For the past few years, we’ve been able to hold our breath, so to speak, in terms of buying more hardware. But especially in the past six months, we’ve really used up all of that extra capacity and then some and finally now have started a really aggressive buying program to replace a lot of the old equipment.”

Peripherals are also needing to be replaced. A Hewlett-Packard Co. spokesman noted that the Palo Alto hardware maker continues to see strong sales of printers.

But PC sales are another story. Andale agrees with Techtel’s assessment of PC sales.

“We’ve found very little pressure to upgrade the desktop PCs and the reason being, most of our employees, even the engineers, just use their PCs to log in to the central server anyway,” Shah says.

He says replacing the older IT hardware, which was wearing out from age and use, brought some unexpected benefits.

“What we could have bought for $10 million four years ago, we can now upgrade that with newer systems that have more capacity and that are faster for like 2 to 3 million dollars or less. We can grow the business at a lower cost,” he says.

Techtel’s Kelly says in the current IT market, buyers are much more savvy.

“The sins of the past — ‘solutions’ that didn’t solve the problem, investments that never paid off and promises never fulfilled — are extensive and remain unresolved for large areas of the sector. The IT industry will need to regain trust and deliver real solutions,” he says.

A phone call in the 1960s helped transform the venture capital industry

BY DAVID SPEAKMAN

When Paul Wythes was an engineering student at Princeton University in the 1950s, he had no idea what venture capital was.

Little did he know that a few years later, a fateful telephone call would change his life and make him one of the pioneers of venture capital and Silicon Valley’s startup heritage.

With a stroke of a pen, as co-founder and chief venture capitalist of Palo Alto-based Sutter Hill Ventures, Wythes has controlled the fates of billions of dollars worth of investments over the years. That’s a far cry from a relatively modest childhood growing up in southern New Jersey.

“I studied and did well in high school and it opened up a whole new world to me,” Wythes said.

Wythes radiates a calm confidence, while his solid posture, tall stature and playful spirit hint more at his basketball-playing youthful past than reality: Wythes will celebrate his 70th birthday in June.

Looking into Paul Wythes eyes, you see into a man who loves
learning.

After a land-based tour of duty in the Navy, which he ironically joined thinking he’d see the world, Wythes enrolled at Princeton to study engineering as a scholarship student.

“I liked engineering, but experienced the business world through summer jobs,” Wythes says, explaining why the business world held an allure for a young man who yearned to see new and exotic lands he’d only read about as a child in New Jersey.

“The dean of the engineering school told me to look at a business school on the West Coast called Stanford. I’d never been west of the Mississippi River,” he says.

At 26, Wythes graduated from Stanford University and took a job with Honeywell International Inc. in technical marketing.

“In those days, most graduates were getting jobs at big companies,” says Wythes, contrasting his life to the current trend of Stanford graduates striking out to join startups.

Like many single, fresh Stanford graduates in 1959, Wythes found a roommate and moved to San Francisco, a continent away from his boyhood home, where he met his future wife.

“She’s from Hawaii,” Wythes says, a passing reference proving that at least one southern New Jersey boy could land a mate from an exotic locale. The couple married and moved out of the area as Wythes’ career took him to Southern California.

Then things changed in 1964.

“I got a phone call from Greg Peterson, a Stanford classmate of mine and a co-founder of Sutter Hill,” Wythes says.

Back then, Sutter Hill was in the real estate development business and specialized in shopping centers, giving many of the valley’s suburbs their trademark strip-mall look.

“[Peterson] said, ‘I want you to come up here and start us in the venture capital business.’ At the time, I didn’t know what the venture capital business was about and I’m not sure he did either,” Wythes says.

Using the study skills he honed as a child in New Jersey, Wythes not only learned the definition of venture capital, he helped shape an industry.

“Sutter Hill Ventures has been around since the mid 1960s; it’s been a firm for 40 years,” says Mark Heesen, president of the Washington, D.C.-based National Venture Capital Association.

On May 1, the NVCA awarded Wythes with its lifetime achievement award.

“When you look at the venture capital industry as a whole, most people put the beginnings of VC at the late 1950s, so he’s been at it from the very beginning and is still at it. Paul’s literally one of the people who invented venture capital as we know it today,” Heesen says.

During Wythes tenure, he helped launch such startups as LSI Logic Corp., Nvidia Corp., Palm Inc., Linear Technology Corp., Network Appliance Corp. and Avid Technology Inc.

“Look at the number of companies he’s founded over the last 30 or 40 years. More important is the number of young venture capitalists he’s helped to mentor through this entire period,” Heesen says.

Wythes points out that he knows what it is like to be in the position of getting a startup off the ground, since he had the same experience launching Sutter Hill.

According to those at the receiving end of Sutter Hill’s investing, Wythes never let his powerful position go to his head.

“We ran into a situation at one point when Xidex was essentially going to run out of money and not be able to meet Friday payroll,” say sLester Colbert, former CEO of one-time Sunnyvale startup Xidex Corp.

“My CFO and I went over to Paul and told him we needed to have a check or we weren’t going to meet payroll the next day — it was as simple as that,” Colbert says. “And with no more questions, Paul sat down, wrote the check and gave it to us. We made the payroll and eventually the company made itself into a very substantial success. That’s the kind of support you get from Paul Wythes — the kind that you are deeply grateful for getting.”

Xidex was acquired by Anacomp Inc. of San Diego in 1988.

NVCA says Wythes is leaving his mark on the next generation of venture capitalists.

“As part of the old guard, Paul Wythes is very candid, very open and honest. It’s a breath of fresh air for young people who are searching for how to work within the venture capital environment,” NVCA’s Heesen says. “He’s very well-grounded. He’s seen technologies come and go and understands that technology that’s hot today may not be hot tomorrow.”

Whether the NVCA considers him part of the old guard or not, Wythes says he is as excited about venture capital as ever.

“I told them in New York when I got the award that I wish I was 50 years younger, so I could do it all over again,” Wythes says.