It is one thing to inherit a heritage and another to sustain it. That is why the guys running Stanford University clearly know their stuff. Stanford University has been the cradle that has nurtured many a Silicon Valley legend. One of them is David Cheriton, professor of computer science who funded Google when it was a start-up. He is hardly the absent-minded professor but on the evening that we are supposed to interview him, we have a no-show. His office is locked and we can hear the landline that we are calling on ring inside. What does not help matters is that his assistant Marianne has mysteriously gone missing after having guided us over the phone to Cheriton’s office. Her landline too is now on answering machine mode and neither do we have Cheriton’s cell phone number. Ironically it is the start-up that Cheriton funded that comes to our rescue. Among the plethora of Wi-Fi networks, we manage to connect on one and log into Gmail to check if Cheriton has written in with a last minute cancellation. Since there isn’t one, we write to him about our unsuccessful effort to locate him and Marianne, the numerous voice mails left, the fact that we had a 4 pm meeting and sign off with our contact number. Frantically refreshing the Gmail page for the next five minutes yields no result, but the phone does ring. Cheriton offers a profuse apology about having his schedule mixed up and promises to be there in about 10 minutes.
How has entrepreneurship evolved over the years, given that the skill set required to become a successful entrepreneur has changed over the past few decades?
I don’t think it has changed significantly. The skill set has always been in recognising that there is an opportunity, something that is not there that people would like, and that there is a way to deliver it at a price that people would pay. People did that 100 years ago and do it even today. What has really changed is that with a communication network like the internet you can take a service across the globe in a very short time period. You can consider Google a prime example of that. There isn’t any company in history that, in such a short period of time, has gone from being completely unknown to a worldwide brand name. Facebook is somewhat similar, although I don’t think they have a very compelling business model. They are still looking for one that justifies their valuation.
How do you think Facebook is going to evolve?
I must admit that I don’t really understand social networking models that well and I haven’t tried to because I have just not been enthused about this whole thing. But one thing I can say is that they have to tread very cautiously between the privacy compromises that have got them into trouble in the past and monetising what they have, which is all this personal information about people. If they do that, they will probably have a reasonable business model, otherwise you have to see if they can continue to offer what they are offering.
Another view about Facebook is that there has been no other company in the history of mankind that has had so much personal information on these many individuals. So it is uncharted territory for governments and for humanity in general. What does this mean? We are still coming to grips with the implications of this. Some of the most interesting experiments in the real world are taking place right now. Facebook is an experiment and so is Twitter. It is fascinating to see how they evolve.
Any other experiments you find interesting as a phenomenon or in terms of technology?
What you might call into question now is to say that since people are randomly guessing, since they don’t have an opportunity to actually count the beans, the guesses would be distributed over ranges so the averages would be reasonably accurate. That seems to be sensible but how many questions would you have of that nature where a bunch of random guesses average out to be a good answer?
You are not in the venture capital business, but you do fund technologists. What’s your approach? And how did you pick Google?
I tend to look at potential investments from the standpoint of whether it is a valuable contribution to society. The world has a lot of problems where you could make things better. When it was evident to me that the Google people had a much better approach to finding the right thing, it seemed like it had tremendous value. Now, to many people, it wasn’t clear how they are going to make money but you can go right back to the time that radio was invented and there were two ways to make money — either subscribers pay for the service or you fund it through advertising. In radio since the 1920s and then in television, to get subscribers to pay hadn’t been very successful. So it had to be an ad-based model. But this aspect — that you know what somebody is looking for — is the holy grail for advertisers. The problem with search engines prior to Google was that their search results weren’t good enough. And because their search was compromised, advertisers did not trust them. Google cracked the search first and then added advertising slowly.
I am a believer in Adam Smith, who says that if you look at something that really contributes value to society and you can deliver it at a reasonable price, then society will recognise that at some point because rational behaviour will come into play. A few other factors, like what is the competition, how long does it take you to get into the market, other barriers to entry and things like that are also important, but fundamental is Adam Smith.
Google has bought Motorola’s telephone arm. Do you see it as sign of growth being a problem for Google going forward?
I think as much as there is a threat, there is an opportunity for Google. One of the things under-appreciated about Google is that here is a fancy algorithm for search. Many people said this algorithm is just not practical to implement, to take it up to scale and to make a business out of it, because the computing power would be too expensive. So, to me some of the genius behind Google is not building the algorithm as much as building an infrastructure that is frankly amazing at an amazingly low cost. I have had other companies tell me Google is able to deliver services at one-tenth the cost they can. With that kind of infrastructure in place, you could do anything that can be delivered over the internet, which opens up enormous possibilities. But they have been wise enough to not step outside what they are doing, instead just building on what they are doing.
Where could the next Google emerge from? Can you think of more businesses that can create the kind of social value that Google has created?
I wish I could. Google, Microsoft and Apple are amazing creations of a certain era. I don’t have a lot of clairvoyance about the future. If I had a brilliant idea, I wouldn’t tell you — I would go and do it probably! Having said that, we are starting to see some incredible innovations in various areas like healthcare where you are integrating information technology starting directly from the insides of the patients to the cloud of computing power. I was talking to somebody from a company recently where they were building pills that have microelectronics embedded into them; there is a communication path all the way through so you can have automatic monitoring of people’s dosages. You can reduce cost by a factor of hundred, if not a thousand, by this type of technology. But I don’t think that will be on a very large scale because there is a lot more friction in the medical world when it comes to delivering value to society.
The infrastructure space is interesting. If you see the cost of electricity, power plants and air traffic control, we are running things like it is the 19th century. There is interesting work happening in all these areas but I don’t see one company harvesting huge benefits; it would be spread more widely. That’s not the greatest thing from the investor’s standpoint because they want that one big thing; but it is still an enormous opportunity for technologists and investors. Companies can be very successful without being the next Google.
How important is it to be the first when it comes to technology products and services? Google was not the first, but was it an outlier?
I think that first or second is not that important. What is important is your timing. It is possible to be too early as well as too late. If Larry and Sergei had come to Stanford five years earlier and developed Google then, would they have been even younger billionaires? But the cost of the hardware had come down dramatically only later and they benefited from that. If you came out with this idea of a much better search engine earlier and it proved to be non-economical, then you have burnt your bridges by getting the funding, setting the company up and getting everything to scale — and blowing the budget by saying, “I just can’t bring in enough money to pay for what it costs to scale this to an economic level.”
There is too much focus on innovation these days where people think you have to come up with something slightly different. It is always interesting to look at examples that contradict that. For instance, Starbucks’ key idea was to say there is actually a market for better coffee. Both coffee and coffee houses have been around for a long time, so the notion that you could start a company exclusively for making coffee, which would be an amazing success, was absurd. They demonstrated how it can happen. It is certainly not about being the first or the second or the third; it is about identifying this gap in the marketplace and how to meet that gap and scale it up.
Are there any segments in technology that seem overstated or hyped to you?
There are certainly many more companies in the social media space than are going to succeed. You either view it as overhyped or as something you don’t understand enough to be investing in. When there is such a large number and you don’t understand, what you are doing, in effect, is gambling with the odds very much stacked against you. I have been very reluctant to invest in this area. In the mobile applications space, which is related, there is a tremendous amount of experimentation. But it is hard to get excited about this from an investment standpoint because the barrier to entry is relatively low, there are a huge number of competitors and there has been this race to the bottom that doesn’t make it all that encouraging, either. These are two areas where there is a lot of visibility but it is not clear to me that there are many investment opportunities.
You say there are many ventures that offer great utility but they may not make sense from an investor’s standpoint — which are these categories and why do you think so?
There are a bunch of areas where there is tremendous utility but it’s not clear if they will be able to build good businesses out of it in a reasonable time frame. For example, I don’t know much about the medical area but I can invest in a team that has a great idea and get a product out. But how to sell it to hospital administrators may be a problem if you have not already figured out the path to do that. Another example: there was this enthusiasm for creating smarter set-top boxes. So a bunch of companies were founded to do this; they came up with various demos and the part they didn’t understand is that the big issue is the content providers. The established set-top box providers say they indemnify the cable providers against legal action from the content providers for unfairly distributing content or leaking things etc. The cable guys say they need that and they are not willing to step outside that. That means as long as the established set-top box providers provide that guarantee, none of the cable operators would be willing to take the risk of going away from that. The start-ups aren’t able to provide that indemnification. Also, many of the features they are providing increased the anxiety among content providers that their content was being used in ways that were not approved.
There is something about military history that fascinates me. You find that many battles have been lost by people with very good military background when they fought battles in a battleground they didn’t understand. I have seen that in business too. You have to look at a marketplace like a battle-ground. Even if the other person doesn’t have as good an army, if he understands the battleground better than you, then you are at a significant disadvantage.
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