Box 3, Folder 45 – General Speeches
November 17, 1984 – Enterprise Forum Luncheon Talk, MIT, MA
11/17/84, Copy of typewritten speech
For the most part, this speech is very similar to that given by Hewlett on April 20, 1977 at GE. He describes HP’s formative years, the origin of their basic philosophies, as well as management and employee relations policies. Towards the end of this speech he discusses some pros and cons on venture financing.
[We do not repeat the first part of the story on HP’s developing years, and jump to Hewlett’s comments on venture financing.]
After telling the story of HP’s growth Hewlett says “he wants to use our own corporate history as a basis for discussing methods of financing corporate growth. The two main methods common today are, of course, through self-generated funds or to accelerate the process, venture capital financing.”
He says “venture capital has been incredibly effective in bringing new industry – particularly hi-tech, on line. I am not here to denigrate venture capital, but to point out that one pays a price for this form of financing. ‘There are no free lunches.’”
Hewlett says he recently read a very interesting article on venture capital written by Joel Kotkin who was primarily critical of this form of financing, mainly from the standpoint of the organizations providing such services. He goes on to say that “Kotkin’s book had a very interesting section on George Doriot, perhaps the father of venture capital, and his American Research and Development Corp. Doriot’s style was to provide lean financing. He is purported to have said ‘If you provide too much capital, the founders might start buying Cadillacs, 50 room mansions, etc.’ How correct he was. His style was to work closely with the young management to nurture them through the ups and downs, not just for the short term but for the long….One of his great success stories was that of working with Kenneth Olsen in the establishment of ‘DEC’….I know only too well how successful ‘DEC’ has been. There are many disciples of Doriot in the venture capital market today – but not all venture capital organizations follow his conservative role.”
Hewlett says he sees “…three main potential problems arising from many venture capital financing techniques. First, is the dilution of the original entrepreneurs interest. I am sure that the point may be made that even a highly diluted interest in a very rapidly growing company may be of greater value to the original entrepreneur than a slow, steady growth, assuming of course, that the founders can acquire sufficient management skills to do so. But these very rapid growths have their own problems. Instant millionaires have little incentive to continue their creative role. I believe Silicon Valley has one of the highest concentrations of Jaguars anywhere in the country. I recently saw a bumper sticker ‘God owes me a Porsche.’”
“A second problem of accelerated growth is that of management development. It is extremely difficult to train managers to staff a year after year growth of 100% per annum….The problem of management development, or the lack thereof, is highlighted if one looks at the rate of turnover in management of many of the most spectacular current crop of hi-tech venture capital supported companies. To understand the nature and extent of the problem, one must look at not just the spectacular successes, but the spectacular failures. Many of these failures should not be solely laid at the door of venture capital, but do suggest that the quality of venture capital support is not uniform and may fail because of inadequate management development.
“A third problem relates to the quality of the organizational structure. I spent some time in my discussion of HP’s rather slow and perhaps ponderous growth and the development of what we now, provincially perhaps, describe as ‘The HP Way.’ By this we mean the tradition and practices that had been built up over the years relating to how the company is to be run and how the employees see their stake and their role in the future of the company. Many of these precepts spring from the fact that at one time, Dave and I were ‘there.’ We knew what it was like to be struggling; what it was like for employees to be struggling; and what is more important, the employees, even the new ones, sensed this to be true., It is very hard to build tradition in a very rapidly growing concern where the top level of management is often brought in from the outside and has little understanding of what the company is like at the working level. One pays a price for forced growth.”
“Having said all this, it seems to me that the following question should be asked: ‘Is venture capital good?’ My answer is ‘yes.’ In many cases, with responsible investors, it performs an absolutely essential service.”
“Is it the only way for small companies to get started? My answer is ‘no.’ There are other ways.”
And to show examples of this Hewlett talks about two companies – Solectron and Computerland. He goes through the development of both. Solectron was started in 1977, and by 1978 was in serious financial trouble. Winston Chen, a recent Ph.D graduate from Harvard, joined it in 1978, when sales were $450.000. And by 1984 sales had grown to $55 million. To achieve this growth $350,000 capital was raised from friends and family.
To solve the problem of management in a period of high growth Chen told Hewlett that he established an in-house school to help their managers become good entrepreneurial managers.
Hewlett says “We have found that in smaller business environments, management theories and training can help a company tremendously if the top management and management in general, is committed to the implementation of the training program.”
Going on to another example of non-venture capital financing, Hewlett says he was recently talking with Bill Millard, founder of Computerland. a retail store chain. Millard says he started with a disastrous association with a small computer company backed by venture capital. Coming out of that he decided there had to be a better way, and started to develop a system that was intended to be self-financing. His idea was to use franchise stores, and he started with $10,000 in capital. Starting in 1978 the company has had a growth rate of over 100% per year. Management has been home grown, and financing has primarily been at the retail store level.
“Private financing is not a panacea,” Hewlett says, “…but in many areas, alternatives are possible. This is particularly true with the rise of service industries whose capital requirements are often nominal. A good example is certainly the independent software firms, particularly if they operate with an aggressive policy of moving forward and not resting on their oars.
“I am sure that there are many other important fields as yet unrecognized that may have growth rates comparable to the electronic industry. In the financing of growth in these areas, all methods of financing should be carefully analyzed and the most appropriate one selected.
“There are alternatives to venture capital financing.”