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“It’s not the end of the world”

, Horst von Buttlar

Joe Schoendorf has been in Silicon Valley for 50 years. The Venture Capitalist talked to Capital about the rise of unicorns and the danger of a tech bubble.

Joe Schoendorf © dpa
Joe Schoendorf

Mr Schoendorf, many people worry about a bubble in the tech sector. Do you see the danger as well?

Well, there is always a bubble.  There’s never a time in economic history when there is not a danger of a bubble. The question that nobody knows the answer to is: When will it burst? Anybody who tells you that they think they do is wrong.  

So your experience tells you that the spectacular rise of 150 Unicorns is not a problem?

Let me tell you a story: It’s been exactly 50 years that I came to Silicon Valley, which was not called that name at that time. I was a senior in college, had a degree in electrical engineering at Purdue University, and it was time to start job interviews. The Vietnam War was going on full swing and engineers were in great demand.  There was a little $200-million-a-year-company in Palo Alto that was called Hewlett Packard who had a plan to go into a new business: computers. I flew out to Palo Alto. When I woke up the next morning, I walked out of my hotel room and there was an orange tree there. It was probably 60 degrees Fahrenheit in January, and I said to myself, “I’m going to Palo Alto”. HP became later the biggest computer company in the world.

And what does this story teach us?

My point is: I have seen booms and crashes, rise and fall. I have seen small companies becoming the biggest in the world. I‘ve been through five major cycles, I watched some and were in some for them. But it’s not the end of the world. In 1974 I read an article in a newspaper, that asked: “Is Silicon Valley the next Detroit?” We had the Oil Crisis at that time, Intel had just made an announcement that they would get out of the memory business – and everybody looked at the massive failure of this great company. But Intel wanted to invest in a new product they just invented called the integrated circuit and they wanted to put all their effort behind that. Now they are the largest semi-conductor company in the world. So, we will have an another downturn, another crisis. If I knew exactly when, I’d probably be smarter than I am. I don’t think it’s now.

"it does not matter"

But we have seen a correction in the last quarter of ’15.

Yes, we’ve seen a correction of 10-15%, nothing more and that’s okay. But there’s still very much opportunity and raw demand out there. Are all the 145  Unicorns out there gonna make it and be successful? No! But it does not matter. Look, five of the top ten most valuable companies in the world are VC backed IT companies. Many of them have only been in business this century - so what are you playing for?  Big opportunity! 20 years ago Mark Zuckerberg was still in High School. Amazon had been online just one year. Apple was close to bankrupt. Now they dominate our world. So if we have 100 companies worth $1 billion and two of them make it to the Fortune 10 list in ten years and are worth $200 billion - it sounds like a pretty good deal to me.

A downturn would not change your mind on the long term perspective?

The long term does not change. If we’re sitting here in 2026 and we take a list of the Fortune 500 companies, 30% of them will be different than the list we have today. This decade will have the highest rated change and the drivers will be failure - failure to digitally transform themselves. Do you remember the Digital Equipment Corporation? In the 80ies they were the number two computer company and everybody thought they were going to overtake IBM. Well, they were bought by Compac in 1998. Today almost noone remembers both names. IBM is reasonably irrelevant in the computer business. Many IT companies are disrupted from the bottom, and the rate of disruption will increase.

So what is your advice to the people that worry?

You always have to look at the big picture. When I came to the Valley the IT Industry was Snow-white and the Seven Dwarfs. IBM was Snow-white and the seven dwarfs where mainframe company’s we don’t remember. They are all gone. We have a tradition of eating ourselves for the past decades. Now you see Media disappearing, it’s totally transformed and Netflix is the new winner. We saw Nokia disappear, Apple won and is now starting to attack core industries. When I am Davos I always look the badges of the people and read the companies name and think to myself: ‘safe’ or ‘not safe’.

And who is safe?

Almost noone is. Bankers, insurance, media, car industry or transportation, if you’re running a business today, you’re in a not safe park.

[Seitenwechsel]

"Yes, there will be failure"

But still the evaluations are very high. During the last ups and downs we did not talk about he “Unicorn effect”. What it the reason for this? Is there too much money out there?

That’s the only reason. We have $100 billion a year chasing venture capital, that’s why we get those kinds of deals.  But the unicorn effect has been overrated. Because the risk is not to the investors, but to the people who took the money. Most investors put massive down cycle tension in the terms and conditions so that if another round of money is raised, their percentage ownership is automatically protected. Which means that the people who took the money are going to have their share deeply compressed. A lot of CEOs didn’t think through what might happen if there was a significant correction.  

So we will see tears and blood?

Yes, there will be blood in the water. Yes, there will be failure, but at the end of the day, ask me how many of the 140 unicorns will be public companies that are worth more than $10 billion? A pretty good number. The top ten club is $300 billion, so if one of them makes it into that then the investors have won.

What are your favorite unicorns?

Do you have children?

Yes.

Which one do you like better? ...... See, I will not answer this question. You know, me and my partners used to sit around, having a beer and I’d ask the question: “If tomorrow you decided you’d retire and you could pick one company of the portfolio for your package - which one would you take?  We wouldn’t have been right most of the time. Because things are too dynamic.  They change rapidly.

"There are very few unicorns in Germany"

Will we see more unicorns in Europe in the future?

I’m deeply distressed by what’s going on in Europe and more distressed than anywhere else about Germany.

Why?

There are very few unicorns in Germany.  Look at the top 50 internet companies in the world.  Germany is number four in global GDP and was a key player in the industrial revolution and the globalization.  But it’s not present in the information age.  Why? There are two reasons. First, the Europeans and especially the Germans do not take enough risk. The EU graduates more STEM (Science, Technology ,Engineering and Math) than the US by a fairly large number.  Germany has a higher percentage of graduates in stem engineering than America, but when it comes to taking risk and building start-ups, their thinking is locally instead of ‘I want to go and build a Google or Facebook’. You’re not going into the number of experiments you need to be running. You need a culture that says “It’s okay to fail”.

What can we learn from the US?

Most of our companys in Silicon Valley fail. So what? We would close that company on Friday and by next Monday, 80% of them will have a new job. Because everybody who has needs for engineers sends out emails, interviews are going on over the weekend, and 80% will work in a new company. Most of those people are probably still under the same carpool.  

And the other 20%?

They’re start-up people and so they can take a couple of weeks off to decide what they’re going to do. We’ve got 50,000 open jobs in Silicon Valley for STEM engineers.

What else does Europe need? More money from investors?

I have attended many conferences in Germany and there is always a panel about the EU government.  Last time I asked: „Guys, I’ve been here for 12 years.  I can’t do this panel anymore. You’ve either got to do something about it or stop talking about it.“ When Rudolph Giuliani ran for president in 2008, they came to Silicon Valley and asked: “If I’m elected president, what would you like me to do?” And we told him two things, “On your first day in office, we want you to get rid of Sarbanes-Oxley”. Sarbanes-Oxley is a very punitive law that does not apply to start-ups. He said, “Okay, what’s the second thing I should do?”  We said, “Don’t do anything and promise never to come back.” We think the government cannot help us, and by trying to put in policies, all they do is slow us down. What the EU government does to European start-ups is it slows them down.  A start-up can run faster and make decisions quicker than other companies. If one of the decisions involves a lot of government rules and red tapes, you are going to have a higher failure percentage of the already smaller number of start-ups that you have.

[Seitenwechsel]

"We want to encourage start-ups"

The digital revolution is now moving to all industries. Germany is very strong in some of them. Don’t you see a good opportunity for German companies?

No.

Why not?

Because most transformation does not occur from within the industry.  It happens outside in the creation of new companies. Let me give you an example.  The German car industry just got together and paid $3 billion for this company Here hat belonged to Nokia. Tell me why?  When I get into a car in the future, I want Android or Apple and I use an app called Waze that’s free.

The German car industry tries to build up knowledge and its own ecosystem.

Bad idea. I like your cars. I own three Porsches, but till, after two years, don’t know what all the buttons in the Porsche Cayenne will do. I’m driving down the road, and I look up on the hood and I say, “If I push that, am I going to get ejected?”  The German engineers think, “Well, we’re going to do a better standard”. But people don’t want another standard. If you get in a car you want to say: “Siri, play X.  Siri, call Y.” My point is: Apple and Google are coming on with cars, I’m not sure if in ten years the car industry in which Germany has a dominant role will have the same role.

What should Germany do?

Well, you’re as smart as anybody in the world. You are better educated than most people in America. You are hard workers and you have a revolution going on from industry to information. You just have to rise up and say: We want to encourage start-ups and will be ready to change laws.  If you have a venture-backed start-up of under 100 people, we’ll give you a special rule that if you fail, the German detection doesn’t apply to you.

Maybe German companies behave differently. If you take the example of the car industry, the assembly line was invented in Detroit by Henry Ford.  It took the German car industry about 20 years to introduce an assembly line and it now it the best cars in the world.  

You probably could do this in those days.  What I’ve learned about the information age is the single competitive advantage that companies need is speed. The future belongs to the fast.  That’s the secret of Silicon Valley. The only advantage we have is speed, so if the Germans believe they can sit back 20 years...

They’re not sitting back...

It is going to be a challenge. I heard about a new Rolls Royce factory in England with just 17 people.  I have been to a robotics factory that runs 24/7.  They employ two people per shift just to walk around in case a robot drops a tool. Let’s suppose the Germans become the best and learn how to take the assembly line and build a Mercedes factory with 17 people - what do you do with the German people?

This also applies to the US.

Yes, that ist the bigger problem that we all face, Europe and the US. Technology is going to take jobs that were created in the industrial age and this is a social problem that every country is going to end up dealing with themselves. Will this cause social unrest in that transition? Absolutely.


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