Startups in Silicon Valley: The beginning – Part 1

Startups in Silicon Valley: The beginning – Part 1

Joris Kersten, Place: Uden/ Netherlands, March 30th 2020

www.joriskersten.nl

Consultant & Trainer Joris Kersten

I am an independent M&A consultant and Valuator from The Netherlands.

In addition, I provide training in “Financial Modelling”, “Business Valuation” and “Mergers & Acquisitions” all over the world (New York, London, Asia, Middle East).

This at leading (“bulge bracket”) investment banks, corporates and universities.

My training in “Business Valuation & Deal Structuring” this March 2020 in The Netherlands is rescheduled due to the corona virus.

But my NEW training calendar in The Netherlands is as follows:

1.     17, 18, 19, 20 and 22, 23 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

2.     24, 25, 26, 27 and 29, 30 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

3.     28, 29, 30, 31 October 2020 + 2, 3 November 2020: 6 days - Business Valuation & Deal Structuring. Location: Amsterdam Zuidas/ The Netherlands;

4.     16, 17, 18, 19 November 2020: 4 days - Financial Modelling in Excel. Location: Amsterdam Zuidas/ The Netherlands.

All info on these open training sessions can be found on: www.joriskersten.nl 

And 130 references on my training sessions can be found on: www.joriskersten.nl 

Introduction

In this sequence of blogs I talk about the valuation & funding of startups.

I have published 4 articles already in this sequence with topics on:

·       Funding rounds, pre-money and post-money valuation and valuation methods for startups.

The links to the previous articles can be found below, in case you did not read them yet.

Before I will continue with the more technical aspects of funding & valuation of startups, I want to talk about “Silicon Valley”. This because when we think about startups we think of “Silicon Valley”.

Last weekend I read a brilliant book on “Silicon Valley” and for the blogs on this specific topic I have used the book as a source:

·       Silicon Valley: Waar de toekomst wordt gemaakt (2014). Author: Eva de Valk. Lebowski Publishers Amsterdam.

This lovely book gives a great overview on what silicon valley is, and its function.

Definitely recommended to read the book when you are a startup entrepreneur or consultant for startups. The book is available in the Dutch language.

Earlier blogs on “Valuation & funding of start-ups”

Article 1: Valuation & funding of start-ups - Funding rounds

https://www.dhirubhai.net/pulse/valuation-funding-startups-rounds-joris-kersten-msc-bsc-rab/

Article 2: Startup valuation: Pre-money and post-money valuation

https://www.dhirubhai.net/pulse/startup-valuation-pre-money-post-money-joris-kersten-msc-bsc-rab/

Article 3: Valuation methods for Startups (early stage) – Part 1

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-1-kersten-msc-bsc-rab/

Article 4: Valuation methods for Startups (early stage) – Part 2

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-2-kersten-msc-bsc-rab/

Silicon Valley: An Introduction

In the middle of Silicon Valley (SV) Stanford University is located.

It is a University set up by businessman and politician Leland Stanford (1824-1893) and his wife Jane Stanford in the 19th century. 

The “first father” of SV is Fredrik Terman (1900-1982) who spent his whole life working at Stanford University.

Terman realised that a part of the campus could be used to grow tech companies in the so called “Stanford Industrial Park”.

In 1953 the first company was located here. And soon the famous company “Hewlett-Packard” followed.

From then on also other tech companies from all over the US opened up locations at the Stanford campus like: General Electric, Eastman Kodak and Lockheed.

And in this area, now called “Stanford Research Park” are now located more than 150 tech companies. And with big names like for example: VM-Ware, SAP, Skype, Nokia, Mercedes-Benz, Tesla and until 2011 the HQ of Facebook.

Terman’s most famous students are still William Hewlett and David Packard, the founders of Hewlett-Packard (HP).

HP is famous for introducing on of the first computers for business (1966), a pocket calculator (1972), the PC (1980) and the laser printer (1984). In 1960 it was located at the “Stanford Industrial Park” before it was set up from the “famous garage”.

(Eva de Valk, 2014)

Frederick Terman, cold war and government

The cold war resulted in a technological ‘flexing of muscles’.

On both sides of the spectrum (US and Soviet Union) a lot of money was spent on technology in order to be able to control each other.

After the Soviet Union lanced the first “Sputnik” satellite in 1957, then America decided they wanted to put the first man on the moon.

This “space race” gave an important impulse to technological innovation. And most of the budgets available landed in the “Bay Area” where SV is located.

For example, a new research centre of NASA located in Mountain View. And Stanford University received, next to MIT, a large part of the budgets available for military related research purposes.  

(Eva de Valk, 2014)

William Shockley: The 2nd father of Silicon Valley

Next to Frederick Terman, is William Shockley the “second father” of SV.

William Shockley is famous for being co-inventor of the “transistor” (1951) with his colleagues John Bardeen and Walter Brattain.

A transistor is an electric switch that can stop or let go electricity. So it puts electricity on or off, like a zero or one in computer terms.

So William Shockley and his colleagues managed to integrate a switch in a semi-conductor. And it was very small, fast and reliable compared to solutions used in the past.

In 1956 the 3 co-investors won the Nobel price for physics for this invention. 

And the semi-conductor transistor opened up a lot of new opportunities like travelling to space.

In 1957, only 6 years after presenting the transistor in 1951, the Soviet Union lanced the first satellite; the Sputnik.

And 12 years after that the American Neil Armstrong made a first step on the moon in 1969. This would have been impossible without the semi-conductor transistor.   

In the years after that, transistors got cheaper and more advanced.

Nowadays almost every electric device contains transistors. From complex computers and spacecrafts, to coffee machines and alarm clocks.

Now let's jump back to Silicon Valley with this in mind.

(Eva de Valk, 2014)

Shockley Semiconductor Laboratory

In 1955 William Shockley founded the “Shockley Semiconductor Lab” in Palo Alto.

Historians argue that Shockley’s choice for location Palo Alto for his company contributed that SV is located in the bay of San Francisco. And this instead of on the East Coast or in LA.

His company was expected to become highly successful, all the ingredients were there:

A great invention (transistor), big chances on commercial success, investors, and he attracted a team of great scientists and workers, and he even had a Nobel price.

But the company fell apart after a year and a half already.

Shockley used “germanium” as the semi-conductor for his transistor. But “silicon” was probably a better choice.

On top of that, he was not a very good manager and annoyed his employees including his top 8 scientists.

In the end, his top 8 scientists left and formed “Fairchild Semiconductors” (1957). They were very productive and timing was great since the “space race” just started.

The Sputnik was just lanced by the Russians (1957) and the US and Soviet Union were both trying to be first in bringing man to the moon.

For the development of rockets and space shuttles enormous amounts of small, reliable and heath resistant transistors were needed.

And this was exactly the product on which “Fairchild Semiconductors” was working. They were doing great!

(Eva de Valk, 2014)

The name “Silicon Valley”

The name “Silicon Valley” (SV) was first mentioned in 1971.

And it obviously comes from the transistor companies in the sixties.

So “silicon” is the semi-conductor used in modern chips.

First the scarce “germanium” was used and then “silicon”; an element that comes from sand.

Silicon conducts better than germanium and also behaves better under high temperatures.

And this makes it better suitable for use in rockets and planes.  

(Eva de Valk, 2014)

Spin-offs of “Fairchild Semiconductors”

The success story of "Fairchild Semiconductors" changed the entrepreneurial climate in the Bay Area (Silicon Valley).

And to leave a company, and to start a competing firm became more normal, and these were called “spin-offs”. This way more and more startups were formed and created.

20 years after 1957 more than 65 chip companies were active in the Bay Area.

And because of all these successful companies, investors and lawyers also located themselves in the bay.

This way the great infrastructure with financial and legal professionals, giving support to startups, was formed.

And this has been very important for the entrepreneurial climate in the area.

"Fairchild Semiconductors" was in the end very successful. After 10 years they had 11 thousand employees and multiple millions in profit.

But there was some trouble within the management and in 1968 Robert Noyce and Gordon Moore stepped out and started again.

This spinoff was the famous “Intel”. A world player still active in Silicon Valley.

(Eva de Valk, 2014)

In part 2 of this blog “The Beginning of Silicon Valley” I will continue with talking about “Intel” and its processor. And then I will jump to Google and it’s early days … Stay tuned ! ??

Source used for this blog

For the blogs on this specific topic (“Silicon Valley”) I have used the following book as a source:

·       Silicon Valley: Waar de toekomst wordt gemaakt (2014). Author: Eva de Valk. Lebowski Publishers Amsterdam.

This lovely book gives a great overview on what silicon valley is, and its function.

Definitely recommended to read the book when you are a startup entrepreneur or consultant for startups. The book is available in the Dutch language.

Under here you can find my previous blogs (over 40) on valuation:

Earlier blogs on “net debt” (cash & debt free)

Article 1: Valuation: Introduction to "net debt" (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-introduction-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 2: Valuation: Net debt (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 3: Valuation: Adjusted net debt – Cash like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-cash-like-items-kersten-msc-bsc-rab/

Article 4: Valuation: Adjusted net debt – Debt like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-like-items-joris-kersten-msc-bsc-rab/

Earlier blogs on Financial Modelling

Article 1: Financial Modelling in Excel: Circular references, interest calculations and iterations

https://www.dhirubhai.net/pulse/financial-modelling-excel-circular-references-kersten-msc-bsc-rab/

Article 2: Excel basics for Finance: SUM, MAX, MIN, AVERAGE, IF, cell referencing, named ranges

https://www.dhirubhai.net/pulse/excel-basics-finance-sum-max-min-average-cell-named-joris/

Article 3: Excel for Valuation: COUNTIF, VLOOKUP, INDEX and MATCH

https://www.dhirubhai.net/pulse/excel-valuation-countif-vlookup-index-match-kersten-msc-bsc-rab/

Earlier blogs on “various topics”

Article 1: Financing a M&A transaction: An introduction

https://www.dhirubhai.net/pulse/financing-ma-transaction-introduction-joris-kersten-msc-bsc-rab/

Article 2: Valuation: How to adjust for “Operating Lease” (under Dutch GAAP)

https://www.dhirubhai.net/pulse/valuation-how-adjust-operating-lease-under-dutch-gaap-joris/

Article 3: M&A closing mechanisms: Locked Box & Completion Accounts

https://www.dhirubhai.net/pulse/ma-closing-mechanisms-locked-box-completion-accounts-joris/

Article 4: Scoping a financial model built primarily for business valuation:

https://www.dhirubhai.net/pulse/scoping-financial-model-built-primarily-business-joris/

Article 5: Consolidation of M&A targets and Purchase Price Allocation (PPA)

https://www.dhirubhai.net/pulse/consolidation-ma-targets-purchase-price-allocation-joris/

Earlier blogs on “bonds”

Article 1: Bonds - An introduction

https://www.dhirubhai.net/pulse/corporate-finance-bonds-introduction-joris-kersten-msc-bsc-rab/

Article 2: Bonds & Bond Markets

https://www.dhirubhai.net/pulse/bonds-bond-markets-corporate-finance-joris-kersten-msc-bsc-rab/

Article 3: Bonds, Rating Agencies and Credit Ratings

https://www.dhirubhai.net/pulse/bonds-rating-agencies-credit-ratings-joris-kersten-msc-bsc-rab/

Earlier blogs on “Valuation & funding of start-ups”

Article 1: Valuation & funding of start-ups - Funding rounds

https://www.dhirubhai.net/pulse/valuation-funding-startups-rounds-joris-kersten-msc-bsc-rab/

Article 2: Startup valuation: Pre-money and post-money valuation

https://www.dhirubhai.net/pulse/startup-valuation-pre-money-post-money-joris-kersten-msc-bsc-rab/

Article 3: Valuation methods for Startups (early stage) – Part 1

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-1-kersten-msc-bsc-rab/

Article 4: Valuation methods for Startups (early stage) – Part 2

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-2-kersten-msc-bsc-rab/

Earlier blogs on the “cost of capital”

Article 1: Valuation & Betas (CAPM)

https://www.dhirubhai.net/pulse/valuation-betas-capm-joris-kersten-msc-bsc-rab/

Article 2: Valuation & Equity Market Risk Premium (CAPM)

https://www.dhirubhai.net/pulse/valuation-equity-market-risk-premium-capm-joris-kersten-msc-bsc-rab/

Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)

https://www.dhirubhai.net/pulse/capital-asset-pricing-model-dead-capm-joris-kersten-msc-bsc-rab/

Article 4: Valuation & the cost of debt (WACC)

https://www.dhirubhai.net/pulse/valuation-cost-debt-wacc-joris-kersten-msc-bsc-rab/

Article 5: Valuation & Capital Structure (WACC)

https://www.dhirubhai.net/pulse/valuation-capital-structure-wacc-joris-kersten-msc-bsc-rab/

Article 6: International WACC & Country Risk – Part 1

https://www.dhirubhai.net/pulse/valuation-international-wacc-country-risk-part-1-joris/

Article 7: International WACC – Part 2

https://www.dhirubhai.net/pulse/valuation-international-wacc-part-2-joris-kersten-msc-bsc-rab/

Article 8: Present Values, Real Options, the Dot.com Bubble

https://www.dhirubhai.net/pulse/valuation-present-values-real-options-dotcom-bubble-joris/

Article 9: Valuation: Different DCF & WACC techniques

https://www.dhirubhai.net/pulse/valuation-different-dcf-wacc-techniques-joris-kersten-msc-bsc-rab/

Article 10: Valuation of a company abroad

https://www.dhirubhai.net/pulse/valuation-company-abroad-joris-kersten-msc-bsc-rab/

Article 11: Valuation: Illiquidity discounts, control premiums and minority discounts

https://www.dhirubhai.net/pulse/valuation-illiquidity-discounts-control-premiums-joris/

Article 12: Valuation: Small firm premiums

https://www.dhirubhai.net/pulse/valuation-small-firm-premiums-joris-kersten-msc-bsc-rab/

Earlier blogs on “Business valuation to Enterprise Value”

From June until August I have written the following blogs on valuation:

1)    Leveraged Buyout (LBO) Analysis:

https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/

2)    M&A Analysis – Accretion/ Dilution:

https://www.dhirubhai.net/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/

3)    Discounted Cash Flow Valuation:

https://www.dhirubhai.net/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/

4)    Valuation Multiples 1 – Comparable Companies Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-1-comparable-companies-analysis-joris

5)    Excel Shortcuts & Business Valuation:

https://www.dhirubhai.net/pulse/excel-shortcuts-business-valuation-joris-kersten-msc-bsc-rab

6)    Valuation Multiples 2 – Precedent Transaction Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-2-precedent-transaction-kersten-msc-bsc-rab

Earlier blogs on Wall Street

Article 1: Wall Street – A general introduction

https://www.dhirubhai.net/pulse/wall-street-general-introduction-joris-kersten-msc-bsc-rab/

Article 2: Wall Street – The Federal Reserve banking system

https://www.dhirubhai.net/pulse/wall-street-federal-reserve-banking-system-kersten-msc-bsc-rab/

Training calendar

My training in “Business Valuation & Deal Structuring” this March 2020 in The Netherlands is rescheduled due to the corona virus.

But my NEW training calendar in The Netherlands is as follows:

1.     17, 18, 19, 20 and 22, 23 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

2.     24, 25, 26, 27 and 29, 30 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

3.     28, 29, 30, 31 October 2020 + 2, 3 November 2020: 6 days - Business Valuation & Deal Structuring. Location: Amsterdam Zuidas/ The Netherlands;

4.     16, 17, 18, 19 November 2020: 4 days - Financial Modelling in Excel. Location: Amsterdam Zuidas/ The Netherlands.

All info on these open training sessions can be found on: www.joriskersten.nl 

And 130 references on my training sessions can be found on: www.joriskersten.nl