Since the news you hear from Silicon Valley is usually that another teen-ager has sold his Web crawler for a hundred million dollars, you probably assume that everyone here is successful. And it is true that there is no place now in the American economy–not even Wall Street–where so much money is made so quickly by so many. But it is also true that most businesses in Silicon Valley fail. For every successful company financed by Valley venture capitalists such as Kathryn Gould, whom I wrote about in my last column, there are nine VC-backed flops. The failed startups that couldn’t even get money from the elite venture capitalists are too numerous for anyone to bother noticing them. Failure is the Valley’s most common economic activity.
But the Valley has responded by making failure something of a badge of honor. In the past 20 years or so, it has created the closest thing in capitalism to the old aristocratic idea of the nobility of failure. Get any prominent Silicon Valley person talking about what makes his culture special, and sooner or later he will say something like this: “We have built a new system. Unlike you people back East, we do not stigmatize people as failures. Here we understand that failure is what happens when you try. We reward it.”
By this he does not mean that people get rich by failing–though they do sometimes make a lot of money by selling to the overheated public stock in companies that will never turn a profit. He means that an entrepreneur who has gone broke three times in a row can, if he has a fourth good idea, find people who will back him. Some of his financial backers will put up their money because he has gone broke three times in a row. “If I am given a choice between a guy who has failed a couple of times and a guy who is starting his first,” says the Valley’s ruling venture capitalist, John Doerr of Kleiner Perkins Caufield & Byers, “I will fund the guy who has failed.”
Enter Jerry Kaplan, to test the point. By most local estimates, Kaplan orchestrated the single biggest flop in Valley history. Between 1989 and 1994, he ran through a shade more than $75 million raised by Doerr. His product was GO, the now notorious attempt to create computers that are attached to pens rather than to keyboards. The personal computer was a thing of the past, Kaplan argued. The next big market was for computers that fit in your pocket, on which you could scribble your notes during business meetings. He whipped Silicon Valley into such a frenzy over this idea that he frightened IBM, AT&T, Microsoft, and other companies into sinking millions into rival products. The $75 million he lost all by himself was, in a way, just the ante for the computer industry. “When you add it all up,” says Kaplan, with more pride than shame, “I figure that somewhere around a billion dollars was flushed down the john on pen computing.”
Y ou might think that a businessman responsible for leading a billion dollars off a cliff would go into hiding and pray that everyone would forget about it. Kaplan instead wrote Startup: A Silicon Valley Adventure, a book about how he did it. “The trick to establishing a new computer product,” he wrote, “is not to make it great, but to make everyone think it is going to be great before it’s actually delivered. Here’s why.” He then proceeded to make all the people who dumped money into pen computing look ridiculous. It was a fearless literary performance. In fact, it seemed suicidal. It read like the work of a man without the slightest intention of eating lunch in Silicon Valley again.
But it was the work of a man who wanted immediately to start another Silicon Valley company. As GO fell apart, Kaplan stumbled upon his next Big Idea: He would use the Internet to design a form of shopping that appealed to men. The typical retail store had been designed to appeal to women, he reckoned, which was why men hated to shop. Kaplan would gather up secondhand merchandise and design a Web site on which the stuff could be auctioned. The garage sale as competitive sport! To fund his idea, he went back again to Kleiner Perkins. He had lost 75 million of its dollars, of course, and infuriated it with his book. But hey, what is ruin and humiliation between friends? Doerr gave him the money.
A few weeks ago, a Stanford business-school student wrote a gently mocking article in the school newspaper about his summer job on Wall Street and then found himself instantly blackballed from job interviews by every Wall Street firm. The forlorn student might well have turned up to see Kaplan speak this fall to an MBA class on entrepreneurship. Two years down the road, ONSALE, Kaplan’s “auction supersite,” was now valued by the stock market at around a half a billion dollars. The company was a case study, and Kaplan was held out by the professor as an example of what an entrepreneur should be. “I have invented my career,” he explained to the students, and he might as well have said that he invented himself. His face was unmarked by toil. His hair, which had gone completely gray during his GO years, was now once again as black as coal. No one could recall a time when Kaplan was not a success. Students wept–wept–as Kaplan described to them the pleasure of making millionaires out of his employees at ONSALE.
The Valley’s willingness to forgive failure may have as much to do with what is being sold here as who is selling it. The business of selling technology to the masses is deceptive. It looks scientific, because its products are the consequence of science. But it is in fact a crapshoot on the culture: You never know what new gizmo people will want to usher into their lives. “This place has a lot in common with Hollywood,” says Kaplan. “Just because you make Waterworld doesn’t mean you’re not ever going to make Titanic.” And just because you lost Kleiner Perkins $75 million doesn’t mean you’re not soon going to have so much money that you have to hire Kleiner Perkins to tend it. Jerry Kaplan has just taken a few of the $100 million or so he has made for himself from ONSALE, and he has given it to John Doerr to invest.