Legendary venture capitalist looks ahead

Some think of Don Valentine as the grandfather of Silicon Valley venture capital.

Since founding Sequoia Capital in 1972, he's helped nurture some of the Valley's biggest successes, including Apple Computer, Cisco Systems, Electronic Arts and Oracle. In all Sequoia, which now manages a $3 billion fund, has helped start and finance more than 500 companies.

Valentine's impressive instincts for good business plans once earned him the title of "the man with the golden gut" from Forbes magazine. But he's not immune to the occasional stinkers: Sequoia has also backed dot-com duds Webvan and eToys.

I really think it's sort of embarrassing for South Korea to have an infinitely greater disposition in broadband than California.

Nevertheless, Valentine is feared and revered among entrepreneurs pitching their ideas on Palo Alto, Calif.'s famed Sand Hill Road. And for good reason. Valentine could also be called the man with the sharp tongue among those he dislikes. Valentine recently spoke with CNET News.com about the past, present and future of Silicon Valley.

Which technology or company is most overhyped at the moment?
Nanotech anything, probably in part because of the huge amount of press coverage of what is sort of a lab fascination with the chemical process of making things small. People don't talk about particular applications, like making Pentium chips 50 times faster or curing diabetes.

So it's the media's fault?
The press has become fascinated with the concept and the scientists and investors and all the people surrounding the phenomenon. They have been interviewed to death. If there is an application for nanotechnology, it's going to be the later part of our lifetimes. You have this huge amount of press coverage and no market problem that needs solving.

What new Internet trend most fascinates you now?
I think the first phase of the Internet is established. We think of it here as the Internet, phase two.

What is phase two?
To us, it's merely the reality phase of something that happens that's overhyped, like nanotech. Now we're really into solid applications, problem solving and business. Look at how much advertising is moving to the Web portals. It's a reconstitution of the way Madison Avenue is thinking about where to place ads.

I got to Silicon Valley in 1959. Nothing is revolutionary; it's evolutionary.

The biggest thing that is making the Internet and all those things more interesting is broadband. It makes the Internet an even more powerful platform in which to buy and sell things--as a media platform and a market. To me it's an issue of patience. (Cisco CEO) John Chambers was talking recently about broadband and indicated that the U.S. is 15th in the world at implementing it.

Should people be alarmed by that statistic?
Possibly, for national pride reasons. Or for business-efficiency reasons. I really think it's sort of embarrassing for South Korea to have an infinitely greater disposition in broadband than California.

What is the computer industry's greatest challenge in the next three to five years?
If you look at the personal-computing industry, only a fraction of the world has participated in this arena. I think it's a huge, huge unit market. Companies like Dell, Microsoft and Intel--they're the primary members of that environment. It's an unfortunate situation that only Intel and Microsoft really make money. The rest, with Dell as an exception, don't make any money. I think the challenge for Intel and Microsoft is to find some other platform in which to grow, other than the personal computer.

What do you make of the upheaval in the business-software industry, of Oracle's hostile bid for PeopleSoft, and of so many other players merging or struggling? Is it changing the way venture capitalists approach and think about startups in this market?
Things constantly evolve in capabilities and directions that didn't exist before. Why would software be any different? There will always be new ideas that large entrenched companies don't think of.

What about the claim by (Oracle CEO) Larry Ellison that the industry will consolidate around a few big players, namely Oracle, Microsoft, IBM and SAP?
I'm in the Marc Andreessen camp against the Larry Ellison-Hasso Plattner camp. If you look at their offerings, neither has a flagship product in the customer relationship management market--10 years later. So I think they are like all big companies, filled and riddled with not-invented-here. They are unable to recognize innovation and they are very late to do what they claim they're going to do. DiCarta, iMany--there are all these small, flourishing companies started in late '90s that are doing very fine, thank you very much. That said, Oracle is interesting and one of my favorite companies.

Why?
Because we financed it and made a lot of money. But also, I'm a great admirer of the kind of raw-boned entrepreneur that Larry Ellison is. He is willing to speak out even if he's wrong occasionally.

Are you adjusting your expectations at all for some of the software companies you've invested in, such as Aceva, diCarta and Traiana?
We will continue to start software companies in categories like the one diCarta is in that are differentiated. The whole thrust of our conviction is that the future is an evolutionary future. New applications are going to emerge and customers will want to do new things.

What about Germany's SAP? It seems to dominate the global market.
It's an interesting company, located intellectually in central Germany. It has the historic flexibility of the Teutonic character. They do it their way, and the customer has to do it and buy it the way they make it. They are a "do it my way or forget it" company and the prices are astronomically high. They're hard to do business with, and when in doubt they deal in FUD (fear, uncertainty and doubt). SAP is the noisiest non-participant in the business.

However, the founders are largely out of that company. It will be interesting to see how or if they change with those guys gone. The same with Microsoft when Gates and Ballmer are gone.

Which technology CEO do you most respect?
Steve Jobs. Steve has managed to simultaneously run two entirely dissimilar companies--Pixar, and he is also running the resurging Apple Computer. I've long been a great admirer of his.

Which company or technology is most underrated but has or will have a huge influence?
I've always been mystified by the critically important disc drive industry, without which the PC is a useless device. You have to be brilliant in electronics, you have to be brilliant in magnetics and you have to be brilliant in mechanics to get all that memory capacity in a very little place and do it for next to nothing. That market has never been rewarded financially for its brilliance. Yet the contribution is huge. Cell phones, handheld products, PCs...they all go nowhere without that fundamental storage capability.

Has anyone learned any lessons from the dot-com bubble?
We should look at the people in the public markets. They never learn the lesson. The game is rigged in their favor. But yes, there was a flaw in the companies people financed. Will we make mistakes again? Yes. But we'll make different mistakes. The people that started all those dot-com companies? That's over. Most people will remember not to make that mistake again.

I got to Silicon Valley in 1959. Nothing is revolutionary; it's evolutionary. Look the sequence of Intel microprocessors. It's all predictable. The nature of silicon and software and storage go hand in hand. In the case of software, you just have to be more clever about the nature of the application. So all these things kind of tick along, feeding off each other.