United States: What´s the State of Innovation Today? Attendees at Red Herring´s ´NDA´ Conference Learn There´s Plenty in the Pipeline

Outta those foxholes, tech believers -- the revolution's not over yet! Pardon another war metaphor, but such was the clear takeaway from the fourth annual Red Herring "NDA" Conference, which was held October 28-30, 2001, in Dana Point, California.

In fact, one might say NDA (an abreviation for non-disclosure agreement) could, in this case, stand for "Not Done Accelerating."

The 400 executives and investors attending the event came to hear what was billed as a gathering of "some of the greatest minds in business, science, technology, and academia, engaging in a dynamic brainstorming session."

But mostly, it seemed, attendees came hoping to get pumped up about the tech economy, or at least slapped upside the head with a jolt of motivation. Maybe some measure of confidence could rub off on them from all those great minds -- who puportedly would have some answers in this "worst tech down-cycle ever."

Red Herring magazine, the last of its breed left standing (i.e., independent media companies focusing on the now-so-uncool New Economy) -- and in the process of repositioning itself from clubby Silicon Valley insider to national
business publication -- knows whereof it speaks.

Herring is now, predictably and thankfully, going back to its roots in real technology -- "not just novel business models," as Herring editor Jason Pontin put it.

Founder and chairman Tony Perkins described his take on current times in the tech industry: "It's like we've all just emerged from the trenches after a World War I battle and see each other and say -- wow, you're still alive! So am I!" However, one good thing is very clear now, he said: "No one's talking about tech being a 'sunset industry'."

Herring's goal with the event was to "define the next generation of innovation" and "identify opportunities for emerging technologies, R&D, venture capital, and investment." What the audience of mostly tech-industry veterans seemed to seek more than anything, though, was a reading from the the very well-regarded speakers, as well as from their peers, as to where we are in the current slump. Is an upturn on the horizon?

The concensus was a resounding yes, with a very real sense of optimism in the tone of the event. To be sure, war metaphors were everywhere, considering the times. Calling the event "the most fun and innovative conference we do," Perkins appeared in a Texas-style cowboy outfit early on, doing his best impersonation of George W. Bush: "I call on you to be patient -- it will be a long mission. We need to smoke out those CIOs from their caves, to spend money!"

The Light at the End?

But plenty of reasons for optimism in the here-and-now were provided as well. For example, though we've been virtually buried in bad news of late concerning the tech slump, we learned that:

• $45 billion is now sitting in VC coffers waiting to be invested, just from funds raised last year. The trouble, says Ravi Chiruvolu of Charter Ventures, is that VCs are holding off "because they have a lot of teenagers in their portfolio." But, in a sign things are getting better, VC Allen Morgan of Mayfield says: "We're now past the midpoint in rationalizing our portfolio."
• Security technology is suddenly mega-hot. "An enormous amount of money is headed to companies in this sector from the Federal government," said Jason Pontin, Red Herring editor.
• Internet usage is still doubling every year. "That means we'll need four times the capacity in two years," said Dave House, CEO of Allegro Networks.
• Nanotechnology, a growing new area of VC investment, will provide major advancements in a whole raft of industries. "There's a lot of opportunity in hijacking biology, " said VC Steve Jurvetson, "with many niche companies using biology concepts for chips." Blaise Zerega, Herring's deputy editor, added: "It could keep Moore's Law going for the rest of the century." Added Pontin, in his inimitable prose: "VCs are going to it like dazzled lemmings."
• The portable computing device market will continue to grow rapidly, with chip prices dropping fast. "While the PC business is becoming the auto industry of the new millennium, and highly cyclical in nature -- the number of mobile devices on the 'Net will actually exceed PCs this year," said Herring founder Tony Perkins.
• Neurogenomics, which addresses the causes of central nervous system disorders, is one of the hottest new drug therapy sectors in biotechnology. It isn't yet on the radar screen of most VCs, says the Red Herring, "but it will be next year." More than $250 million was invested in this sector in the first six months of 2001.
• "The greatest companies of the Internet era we don't even know the names of yet -- 90% of the innovations associated with the Internet are still ahead of us," said Tony Perkins, founder of Red Herring. "The theme of the past was the bubble. The theme going forward is exponentialism." As in accelerated innovation, in a whole range of technology sectors.

Come On, Spending!

Though Perkins gave more of a role this year to CEO Hilary Schneider ("Been a tough year--glad I wasn't CEO!" he said), he took the stage on the second morning for a whole session all to himself: an inspired combination forecast and peptalk that saw few empty seats. Two other key points he made:

• IT will go to 10% of total corporate spending by 2010, according to the latest industry research. (One oft-cited leader in this regard, Cisco, is already at 6%, well ahead of the average.)
• And, by 2010, IT spending will be 40% of GDP, up from 20% now.

Other NDA Highlights and Quotes

"Herring said early on there is no New Economy -- let's just think of it as a rest." - Michael Krasny, event MC and Host, NPR's Forum program, and English Professor, San Francisco State

"America's innovative spirit -- that is our advantage." - Tony Perkins, Founder, Red Herring

Rules for success: Paul Jacobs, group president, Qualcomm, said two of the big lessons he's learned are these: (1) "Every business must walk through the Valley of Death -- you have to feel failure viscerally to become a success."... and (2) "You must be be passionate and persistent -- you can't just sit there staring at the obstacle, saying 'Why me?'"

"The financial guys were too focused on making money from the transaction, instead of *after* the deal -- on the company itself." - Esther Dyson, EDventure Holdings

"It's not easy to take defense technologies and commercialize them. But the DOD is pushing to use more commercial products -- so there's an opportunity to take technologies out of government, commercialize them, then go back in." - Jason Rottenberg, Exec Dir-Strategy & Research, MILCOM Technologies

"This is the only time I can remember, in my 20 years in the Valley, when the IPO and M&A markets were both dead at the same time. It's usually a sine/cosine type of thing." - Allen Morgan, General Partner, Mayfield

"We became the People Magazine of the business -- taxi drivers knew us! We funded one too many dreamers." - Ravi Chiruvolu of Charter Ventures

"The wrong people got identified as the rock stars -- the entrepreneurs are!" - Allen Morgan, General Partner, Mayfield

"Any new Microsoft software is indistinguishable from a denial-of-service attack." - Bruce Schneier, CTO, Counterpane Internet Security

"Customer churn is going on in this climate, opening the door for aggressive sales tactics." - Mike Homer, CEO, Kontiki

"We've been whipsawed. But good companies are being built through it all." - Tim Draper, Managing Partner, Draper Fisher Jurvetson

"We were judging success on such short timeframes! In the good old days, we said it took 3 to 5 years to get to major milestones. We need to get back to that." - Paul Deninger, Chairman and CEO, Broadview

Press Magnet

Lots of reporters showed up at NDA. In fact, the Monday morning press breakfast had not a single seat open. Herring used the occasion to preview the top-ten trends they would debut later in the day--and some interesting discussion ensued.

A considerable amount of media coverage resulted from the event. The press list included, in addition to myself representing Conferenza, reporters from:

• The Atlantic Monthly
• Bloomberg News
• CBS Marketwatch
• Cox Newspapers
• Dow Jones
• The Economist
• Financial Times
• National Public Radio
• Orange County Register
• San Diego Union Tribune
• Wired Magazine

Best Session Concept

The "Eggheads Unplugged" panel was a highlight. It consisted of:

• Eric Schmidt, CEO, Google (whom I personally thanked that a search on my name now yields nine Google pages...he said, "Who?")
• Steve Jurvetson, Managing Partner, Draper Fisher Jurvetson VC (always a favorite, having been called "the smartest VC in the Valley"...he told me that would be despite the fact that he reads my reports regularly)
• John Gage, Chief Researcher, Sun (Mr. Smooth Voice, and a smart guy, too)
• Bruce Schneier, CTO, Counterpane Internet Security (a pretty quotable guy)
• Tim Harris, CEO, Structural Genomix (a Brit, and one of those new biotech studs)

The format for this session was this: the moderator would draw a topic from the fishbowl, and the first panelist to ring his bell won the right to voice his opinion on that topic. A few quotes of interest:

"Stenography" (hidden messages, like text within pictures) - Bruce Schneier: "There aren't any business applications for it! Even digital watermarks won't last."

"The Next Great Tech Wave" - Eric Schmidt: "Computers can't keep up now with the flow of bits. We need new communications-oriented computers."

"Exponential Curves in Technology" - Tim Harris: "Human genome sequencing was exponential from the late '80s to today--90% of it was done in the last seven months." - Eric Schmidt: "Storage and fiber optics...But remember the business ramification: if your technology is doubling every year, your business value better be, too."

"The Vacuum Tube of 2002?" - With the panel slow in responding, two cheeky suggestions popped from the audience almost concurrently: "Windows" and "the PC industry."

"Nanotechnology" - Tim Harris: "An example in our business now is 3D structures of proteins." - Eric Schmidt: "It feels like the '50s with transistors. Doesn't scale yet." - Steve Jurvetson: "It's about more than smaller, faster, cheaper. It's like the digitization of matter. It turns laboratory science into information science."

"Quantum Computing" - Bruce Schneier: "The first such machine will be used to break RSA's security. It's now in the lab." - Eric Schmidt: "Two words: carbon nanotubes." - John Gage: "There's a great book I'd recommend you re-read: 'Shockwave' by John Brenner."

Biggest Disappointment

There was a lack of any great big-bang insights from the above panel, unfortunately, or at least any that appeared to juice up the crowd. Maybe the session was just too short. If nothing else, though, it was fun. My best sound-bite award came out of this session -- it goes to Bruce Schneier, CTO of Counterpane Internet Security. His quote (also mentioned above): "Any new Microsoft software is indistinguishable from a DOS attack." I love that one...

Worst-Scheduling-or-Logistics Award

Otherwise known as Worst-Session-in-a-Supporting-Role. My vote for this one goes to a panel on "Venture Philanthropy and Social Entrepreneurship," strangely jammed into lunch the first day, dominating the entire thing. It was a complete bust. No one in the room wanted to do anything but schmooze with their neighbors--that's what you do at lunch! (Especially on the first day.) Yet the panelists droned on, apparently refusing to believe no one was listening. "Geez, write these people a check so they go away!" was one comment overheard nearby. The decibel level of the collective conversations and the panelists' monologues, blaring through the speakers, each vying to drown out the other, was torturous. To make matters worse, lunch had been billed as being outside on one of the glorious patio lawns overlooking the very-blue Pacific, and the weather was great!

A Sampling of Other Quotes from NDA

"Instead of 'first-mover' it should be 'first to get it right'... Dell could be said to be the first in their market to do that -- a hundred went before them....We need to introduce patience as a metric in evaluating entrepreneurs." - Paul Deninger, Chairman and CEO, Broadview

"The tech industry has always been defined by cyclical periods... and it's never been so low." - Jason Pontin, Editor, Red Herring

"We believe we're on the cusp of the next era....The boom is just stalled....It's now about bringing Internet advancements into creating a world of ubiquitous computing -- the always-on utility." - Jason Pontin, Editor, Red Herring

"The expedition where we found the super-croc went 40 days in the desert before we discovered it. I lost 25 pounds in 30 days. It took perseverance." - Dr. Paul Sereno, Paleontologist, University of Chicago (the Sunday evening reception speaker--a big hit)

"Great entrepreneurs make their own luck, just like Paul Sereno." - Hilary Schneider, CEO, Red Herring Communications

"We worry now about burn rate, and getting to cash flow positive. A company is not a success till then!" - Paul Deninger, Chairman and CEO, Broadview

"A large number of companies need capital, and it's not coming from public offerings or VCs....The private equity firms are the last ones standing--all of them basically in New York....They're now seeing valuations come down to where they understand them." - Blaise Zerega, Deputy Editor, on Red Herring's "Merger Madness" trend

"I just spent some time in LA, and I'll tell you this -- with Bush at a 92% approval rating, I think I now know where the other 8% are -- they're all in Hollywood." - Tony Perkins, Founder & Editor-in-Chief, Red Herring

"How bad is it in telcom? We monitor prices on eBay, and we're now seeing manufacturers buying back their own equipment to stabilze prices." - Dave House, CEO of Allegro Networks

"The road is still there, we just have to work through the bumps. It's not a fundamental break--just a resetting." - Henry Samuelli, CTO and Cofounder, Broadcom

"The real sale now is to marketing and finance." - Dave House, CEO of Allegro Networks (whose company just raised a second round of $50 million...an *up* round, even!)

"Our ultimate vision--broadband anywhere, anytime--will take a long time to become ubiquitous. We only have 10% penetration for broadband now, and it will take maybe 10 years more to get 20% penetration." - Henry Samuelli, CTO and Cofounder, Broadcom

"The human genome is the mother of all simulation projects." - Bruce Schneier, CTO, Counterpane Internet Security

"In this security trend, the focus of companies is on protecting their own environments, but that's dangerous for the VC world." [Presumably because other areas of tech spending get short shrift?] - Roger McNamee, Integral Capital Partners and Silver Lake Partners

"We'll see Napster-like responses to everything privacy related [P2P startups]. But how much of this will not be investable--like Napster?" - Roger McNamee, Integral Capital Partners and Silver Lake Partners

"We think nanotech is the next great wave. Just look at the number of media stories on it -- in 1999-2000, it was about the same as the Internet was in 1992-93." - Steve Jurvetson, Managing Partner, Draper Fisher Jurvetson VC

Tony Perkins Does a One-Hour Monologue

Selected quotes from the combination tech-industry outlook and pep talk that Red Herring's founder and editor-in-chief delivered on the second morning....

"The math must add up. The Herring rule is that great companies are worth 3-4X revenues. Really, really great companies--like high-margin software companies--might be worth 8X. No company is worth more than 10X revenues."

" B2B e-commerce will go from $131 billion in 2000 to $3-6 trillion by 2005."

"I got wireless DSL at home, and it rips. I can use my Powerbook anywhere. Trouble is, I had to have to whole Herring IT department over to my house to get it set up."

"VCs still have deep pockets -- but very short arms right now."

"At the Herring, we like entrepreneurs. What makes them good is this: they focus, they're cheap, they're competitive, they're innovative, and they're risktakers. And most of the best ones dropped out of college -- so remember that when you're hiring people."

"When I was a young banker at Silicon Valley Bank, and Sun was one of my accounts, I was contemplating starting my first venture (Upside Magazine). I was unsure about it, so I asked Scott McNealy. He told me, 'Just do it -- it doesn't hurt.' "

"Young people will drive the adoption of text messaging in the U.S. Already, 14-year olds can't remember life without instant messaging."

The Heroes Take the Stage: The Entrepreneurs

Eighteen companies gave five-minute presentations during two one-hour sessions on the second afternoon, each introduced (and carefully kept to their time limit) by seed-stage venture guru Robert von Goeben of StarterFluid in San Francisco.

A few of the presenting company standouts, in my opinion, were:

Semiconductors:

• Impinj: A fabless IC company that uses new tunable transistors to enable precision analog and RF in low-cost digital CMOS. "Now analog can benefit from Moore's Law, too," said CEO Bill Colleran. Raised a $15 million first round September 2000.

Security:

• BioNetrix Systems: A single, patented platform to manage authentication for an organization's information applications and transactions. "It's an open, agnostic solution, relying on no hardware," said CEO and former IBMer John Ticer. Total capital raised of $19 million; last round March 2000.
• Tripwire: Software that takes digital snapshots of files and digital hashings of data stored within companies' networks, then encrypts it. When files are accessed by unauthorized intruders and data signatures are compromised, network operators are notified immediately. "It's about data integrity, not managing perimeters," said CEO Wyatt Starnes. Raised a $24 million third round in January 2001; total of $35 million.
• Counterpane Internet Security: A managed security monitoring services firm focusing on intrusion detection and response. Its system requires no new software or hardware investments. "We're about brand protection. We take ordinary sys-admins and turn them into security gods," said Tom Rowley, CEO. Raised a third round of $24 million in November 2000; $58 million raised in total.

Wireless:

• Seven: Software that allows wireless carriers to offer data-access services to their business customers. Current GPRS product is available for both GSM and TDMA, allowing always-on access to corporate MS Exchange email on wireless handset-with ability to switch between 'Net session and phone call. "Our key customers include BT and Cingular, and we have 85 people," said CEO Bill Nguyen. Has raised $64 million total, with a $30-million second round in August 2001.

Other:

• Kontiki: A secure media delivery network for enterprises and entertainment companies. Allows for creation of end-to-end subscription services, reinforcing the branded experience. "We're like Pagemaker in '85, enabling people to create," said CEO and former Netscape exec Mike Homer -- in this case, their own content delivery experience, via a web-based console. Its sales effort is now focused on the enterprise market, Homer noted, while his bus-dev people are working on the longer term media company market. Raised first round of $18 million in late 2000, and "still have $11 million left," said Homer.

Herring's Top-Ten Trends -- and a Suggestion

The traditional editorial hook of NDA is Red Herring's presentation of its annual "Top Ten Trends" for the following year. Going out on a limb like this is part of the Herring schtick -- and it does create some sense of anticipation and buzz. The magazine issue featuring the trends is debuted at NDA, about two weeks ahead of the newstand.

This year's list? Well, here are the sound-bites...but read the whole feature yourself in the November 2001 edition (now out) for more details:

1. Data Central (data centers become the central office of the future)
2. Feeling Safe (billions will be spent on miliary & security technology)
3. Small Worlds (nanotechnology will mirror the investor buzz in biotech)
4. Brand Power (new wireless 'virtual network operators' set to take off)
5. Merger Madness (value of deals led by private-equity firms to skyrocket)
6. Old World Supremacy (Europe flexes its regulatory power over high-tech)
7. Potential Energy (renewable sources like fuel cells become cost-effective)
8. Head Strong (biotech's focus on neurogenomics will spawn drug successes)
9. Gadget Madness (low-cost ICs cause multifunction devices to proliferate)
10. Network News (big biz embraces digital media networks, for itself)

What kind of success rate does Herring have on these predictions? They do grade themselves pretty honestly from year to year, I've found. (See the November 2001 issue, wherein they say they deserve at least one F from last year). In general, they seem to have made more right calls than wrong ones over the past few years, to which I can attest as an attendee at four straight NDA conferences.

But I'd suspect Herring would actually look better on some of these predictions if they graded themselves two, three, even four years after making them -- not just one year. After all, we're being continually told that technology and business innovation should be looked at in the long term these days, right? So, maybe Herring is missing an opportunity in this regard.

The Closing Panel: "Keeping Innovation Alive: The Future of Company Creation"

The final session yielded some great insights, and even more reasons for optimism....before we all had to scatter from this wonderful two-day break, contemplating the future of technology innovation by the sea, as it were.

-Tim Draper (answering the question "Are you still dribbling money out?"):

"Yes. We used to pay, like, $10 million for 10%. Now, we're investing smaller amounts, with larger teams, and for larger percentages. There are great entrepreneurs out there now. We're actually investing only slightly less than we were a year ago." -Paul Deninger, Broadview (answering "What's different about today's market?")

"With fewer companies to invest in, the quality will go up. The cost of capital will be higher, but you'll be able to demand more quality, more value-add, from your VC."

"What trend in this second stage of the Internet most excites you?" moderator Tony Perkins asked.

-Draper: "The ability to reach large masses in a unique way -- as in P2P. We have a few investments there. And nanotechnology -- when things naturally go from mirco to nano, you can do a lot of things."

-Deninger: "The Internet today can't possibly be the ultimate one! It has to improve -- better, faster, cheaper."

Final Thoughts About "NDA 2001"

With a strong four-year track record now, it's clear that NDA is established as one of the best high-level confabs out there in tech-land. While other events and competitors have faded away around them, they hang in there -- continuing to attract the big thinkers and doers in the technology and venture communities. And they have the ability, as few others do, to keep things in perspective, not take themselves too seriously, and make it all fun.

A Sad Epilogue

Just after my report on this event was originally published (in mid-November), The Wall Street Journal broke this surprising piece of news: "Red Herring Communications Closes Its Conference Division." The magazine, despite having just received a capital infusion of $10 million, had succumbed to the pressures of the slowing tech economy, as have so many of the firms it chronicles.

© Copyright 2001, Graeme Thickins. All rights reserved.