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As the Silicon Valley Turns
By Brian D. Rossman
Sipping their lattes at Starbucks, two Silicon Valley brothers--brothers-in-arms and engineers-in-demand--are disputing the latest coding techniques when their discussion turns into a debate on the merits of cashing in on the start-up craze.
The younger brother (let's call him Hare) says everyone he knows has an idea for a business start-up. "Even Mom wants to sell her pickles online," he says.
As with any good engineer, Hare supports his argument with evidence. He quotes Bill Gardner, economist with the University of Southern California Entrepreneurship Program, who asserts that the current level of start-ups is the highest it's been in the last 100 years.
Hare adds that Bruce Camber, founder of Small Business 2000, commented that one out of five Americans are involved in some way in a new business startup.
Hare's older brother (let's call him Tortoise) isn't impressed by the statistics and doesn't buy Hare's assertion.
Tortoise has worked in the Bay Area since it was known as the Valley of Hearts Delight and when there were prune trees in the Pruneyard.
The real issue with any start-up, says Tortoise, is its chance for success. Tortoise knows. He's seen the economic landscape change, and watched the median housing price in Santa Clara County climb to $577,820.
"Hare, don't you realize that the majority of start-ups that are not around after four years?" says Tortoise. He cites a recent Wall Street Journal article, that said almost a quarter of all small businesses shut down or file for bankruptcy within two years and that more than 50 percent dissolve within four years.
Additionally, Tortoise says, a study by researchers at Ball State University and Drake University indicates that the number of small business failures in this country is growing at an alarming rate. On top of that, 93 percent of all new business ventures in the country eventually fail.
"These are lottery type odds," Tortoise says.
But with visions of dotcom stock options dancing through his head, Hare shrugs off his older brother.
"All I need is two years and--bam!--I am set for an IPO," he says. "Those odds don't scare me. Look at the venture capitalists." Traditionally, Venture Capitalists set their risk/reward chart at a 90 percent failure and 10 percent success rate. As long as their 10 percent successes are "home runs," with returns greater than 100 times initial investment, venture capitalists will continue to make money hand-over-fist.
"And I," Hare adds, "plan to be one of their home runs." Tortoise changes his approach.
"Brother, even those odds are deteriorating," he says. "In March, prior to the market correction, Merrill Lynch predicted that of the 300 or so pure-play Internet companies that have gone public, 75 percent of them will never make money and won't exist in five years' time. What will your paper options be worth then?"
"Haven't you heard of the gold rush?" Hare exclaims. "This is like the 1849. I am prospecting for gold. I will make my mark and be rich beyond my imagination."
This makes Tortoise realize he needs to be dramatic. Even though he doesn't want to, he needs to deflate his brother's dream. He needs to get his brother to open his eyes and take a realistic look at his chances, instead of looking at it through media's rose-colored lenses.
"Why do you think you will be one of the successes?" Tortoise asks. "What special training or experience do you have to make your business succeed where others have failed? Tulane University did a study that discovered the average small business owner fails an average of 3.8 times before they succeed. The study also said that the most common reason for the failures was the owner's lack of business knowledge."
Was Tortoise correct in attempting to provide Hare with a dose of reality? Does Hare's dream deserve his brother's support, even if Tortoise doesn't think it will bring the success that Hare thinks it will?
These are tough questions faced by real players everyday in our Valley, a place formerly known as the Valley of Heart's Delight.
Stay tuned for the next episode of "As the Valley Turns."
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Sunnyvale, California Since 1994
