The Three Horsemen of Silicon Valley

Everyone has heard about Silicon Valley; the home to big names in the high tech industry such as Google, Yahoo, McAfee, Adobe Systems, Cisco, Apple, Ebay, Oracle and many more. The term “Silicon Valley” was coined by Ralph Vaerst, a Northern California entrepreneur, in 1971.

Geographically, the Valley is the Santa Clara Valley, which is located in the southern part of the San Francisco Bay Area in North California. The term originally referred to the region's large number of companies working on silicon chip technology, but eventually came to refer to all the high-tech companies in the area.

Venture capital investments in Silicon Valley began with Kleiner Perkins in 1972. After that, many semiconductor companies emerged in the area. The $1.3 billion IPO of Apple Computer in December 1980 marked the beginning of a new era in venture capital. Investors were less reluctant to invest in early stage companies (start-ups). Many of the start-up companies changed and shaped the future of high tech industry; making venture capital the most crucial part of technology advancement and financing. Even though venture capital as an investment is growing virtually everywhere in the world, Silicon Valley has been in the lead since the 70’s. In 2007, venture capitalists invested $7.6 billion in San Jose and another $2.5 billion in the San Francisco/Berkeley area.

In this special California issue TURKOFAMERICA will get insider information from three important figures of the venture capital community in Silicon Valley: Barış Karadoğan, George Nuray Uğraş, and Aydın Şenkut.

Let’s get to know these wonderful people briefly. Barış Karadoğan is a partner at Velocity Interactive Group who focuses on the internet and digital media investments. Prior to joining Velocity Interactive Group, Karadoğan worked six years at U.S. Venture Partners, a leading Silicon Valley-based venture capital firm. Karadoğan's recent board seats/investments include: HIP Digital Media, Like.com, SpectraLinear, Minerva Networks, Redline Communications (LSE: REDL) and Aspendos Communications. Before becoming a venture capitalist, Karadoğan worked in both engineering and marketing at 3Com/U.S. Robotics, where he worked to develop the company's networking and cable industry products. His efforts at U.S. Robotics resulted in a number of U.S. patents.

Karadoğan has a strong background in terms of his education as well; he holds an MBA from Stanford University Graduate School of Business, where he was an Arjay Miller Scholar, and an MS in Electrical Engineering from Stanford University. He earned a BS in Electrical Engineering from Lafayette College, where he graduated summa cum laude. If you want to keep yourself up-to-date on recent developments in venture capital industry and get to know Karadoğan, you should invest the time to read his blog, "From Istanbul to Sand Hill Road” (http://baris.typepad.com) which focuses on high technology, venture capital, innovation and creativity.

N. George Uğraş joined Adams Capital Management in 1999 as a General Partner, from Apax Partners, a private equity firm in New York. Prior to joining Apax Partners, he was a Management Consultant at McKinsey & Co. in New York, working closely with clients in the telecommunications and media industries on strategic and operational issues for media and technology clients.

His industry expertise includes electronics, networking infrastructure and  semiconductors. Uğraş received his B.S. in Engineering Physics from Fairleigh Dickinson University, and his Ph.D. with honors in Applied Physics from Yale University. He was Research Fellow in Physics at the California Institute of Technology before he decided to pursue a career in consulting. His current board seats are BuzzLogic, Inc., DATAllegro, Inc., NextIO, Inc., Luminescent Technologies, Inc., Optellios, Inc., Qspeed Semiconductor, Inc., and TouchdownTechnologies, Inc.   

Among the three gentlemen Aydın Şenkut is the one most frequently featured by the media in the US. The fact that he was an early Googler has a lot to do with that. He joined Google in 1999 as a Product Manager (he was employee number 37 – his official number is 63 but 37 is the actual number) to launch Google's first 10 international sites, its first online search licensing products and its first Safe Search. He then became the first International Sales Manager at Google, eventually closing deals with all of Google's strategic syndication partners in Asia, including NTT, NEC (Biglobe), Fujitsu (Nifty), and Rakuten (Infoseek) in Japan, Sina, Netease and Tencent in China, Korea Telecom, Empas, and Dacom in Korea, iPrimus/AOL in Australia, and Yam and Hi-net in Taiwan. After Google’s IPO, Şenkut cashed in his options and took some time off to rest and to decide what to work on next. He entertained other options in retail and the restaurant business only to come back to what he knew - the high tech industry. He founded Felicis Ventures, an angel investment firm in 2005. He has invested in over 30 companies, including Buzzlogic, Disqus, Dogster, Meraki, Mint, Shopittome, Yapta, Yume Networks, Venturebeat, Webs.com, and Weebly since then, pitching in between $25,000 to $100,000 at a time.

Before joining Google, Aydin was the Product Manager for the Data Visualization and Data Mining software MineSet, and led the business development efforts for the financial services industry at SGI. Aydin received his BS in Business Administration from Boston University, his MBA in Marketing from the Wharton School and his MA in International Studies from the School of Arts at the University of Pennsylvania.
I met with Barış Karadoğan, George Nuray Uğraş and Aydın Şenkut for lunch at a restaurant in Palo Alto; we continued our conversation at Barış’s office two blocks down on University Avenue.

First question goes to Nuray. You invested a lot in your academic career before you decided to become a consultant, eventually going on to the VC track. What triggered your decision?
George Nuray Uğraş:  First let me say that I miss academic research at times, but to me it is a big and a hard decision to invest 30 years of one’s life on a tiny detail, especially when the implementation of your findings is not entirely up to you. What lured me into this field was the ability to see the big picture rather than getting lost in details.  

Barış Karadoğan: I definitely agree with Nuray, especially in the semiconductor industry you want to refrain from details as much as possible. VC’s have to keep a balance between research and the actual value add of that research.

What would you say is the primary value add of a good VC/VC firm, or an angel investor?
Barış Karadoğan: A good VC has to analyze the added value the new product or process offers. “What makes it different than the existing products? What makes it better than the existing solutions?” are the questions to be answered first.

George Nuray Uğraş: Market analysis is more or less done by every entrepreneur before they start a business, but the main value is hidden in go-to-market analysis of a product or a solution. Even though China and India are strong technically, the main reason they struggle with introducing new technologies lies in this go-to-market analysis. The U.S. has been doing it for a long time. Strategic and tactical marketing execution is something VC companies excel in and add value.

Barış Karadoğan: Knowledge of the product development process is the key here. To identify what it takes to bring a product to market requires perspective.

Aydın Şenkut: Angel investors come in earlier than VC’s in the process. Since they are individuals investing their own money like myself, they do not invest as high amounts as the VC’s. Angel investors bear a lot of risk, so they look for a higher return on their investment. Mentoring the entrepreneurs early in the process, coaching them for their VC fundraising activities are notable value adds of angel investors.

Why do you think most successful companies emerge from the U.S. and not Europe ?
George Nuray Uğraş: We can classify the reasons in two categories. One is cultural, thus educational; the other one is the way companies operate, how they define functionality. In Europe (including Turkey) education is more vigorous, you go deep in each subject, where in the U.S. you don’t go as deep in every subject, you have more freedom and more interaction between the disciplines. As a result of this you see differences in the way companies operate, in functional definition of the companies. For instance the decision making process in companies like Apple and Google varies from the traditional bureaucratic decision making.

Barış Karadoğan: I agree with Nuray. I want to add a couple things to that. The U.S. has a lot of experience doing this. It has a huge market and it has been investing a lot to monitor this market over the years. A product successful in the U.S. is very likely to be successful in the world. The U.S. has been the trendsetter in technology.

Aydın Şenkut: I agree with the main points Nuray and Barış made. I personally think the Israeli model works very well, where they do the research and development in Israel and the product development, market analysis and sales components in the U.S. It gives you the best of two worlds. That model has been successful in many cases and I see it as a good fit with Turkey.

Where do you think the venture capital industry stands in Turkey today?
Barış Karadoğan: The most important advantage in working with a VC firm is the money for the resources. VC money allows the entrepreneur to be able to stand up to the big players in the industry, by getting the resources he needs to evaluate the validity/feasibility of an idea as fast as possible. If you look at the process from this angle, there are similar instituions in Turkey that operate similarily to the VC principle like banks, but as we discussed earlier, these institutions lack the other value adds a VC firm has to offer.

George Nuray Uğraş: I think there are two types of VC in Turkey. The first one is the funds an individual raises among friends and family; the second one is the banks. So we can easily say that the concept of one individual or institution giving money to another to start a business is present in Turkey. However, the sole act of VC’s here in the U.S. is investing. There is a high probability that money invested will be lost. I am not sure this concept is well founded in Turkey yet.

Aydın Şenkut: When it comes to angel investing, there aren’t many examples in Turkey. The hardest challenge I face is many start-ups in Turkey is that they take a concept that has been successful in the U.S. and they try to repeat that success with limited resources in Turkey. I cannot invest large quantities of money since I am not a big enough firm to give them a sufficient competitive edge in the high tech sector.                                                                                                                                                                                                                                                      
What are the elements that need to come together for Turkey to start its own venture capital funds? Some say trust can be an issue in terms of venture capital funding in Turkey. Do you agree with that? Do you think Turkey has the right combination of qualities to attract VC money from the US?
Barış Karadoğan: I think trust is not an issue. There ways to overcome that, you can regulate more if you are worried about how the companies you are investing in use the money. The most imporatnt quality of the Turkish people in this context is their ability to take risks. I think culturally that is a plus. When I think about things that needs to be improved, the first thing that comes to mind is patience. You cannot expect a return on your investment in months or even a year. The investors in Turkey have to start thinking about long term gains to be succesful. Also failure should be acceptable. After all, you and the people you are investing in are all taking risks. Everyone should be in the right state of mind. The business culture is important as well. Here in the U.S., business is business, no one questions another’s religious beliefs or political views. They partner if the project is promising. We have to instill more of this attitude in Turkey.

George Nuray Uğraş: The first thing you need for a successful VC system is the capital. It exists in Turkey but not in the right places most of the time. For years the best investment was to lend money to the government; that perception has to change. You need good ideas and creativity and I believe Turkey is capable of that. Turkey also has the skill set (engineers, scientists to work on new projects) it needs. The only thing we have to work on is the cultural aspect of things. Especially legal and trust issues. In California a verbal contract is binding. If you signed your terms on a piece of a napkin that will protect your rights. You won’t wait for years for a case to be resolved. Turkey has a lot to do in terms of legal issues. First, the legislators have to do the ground work to protect the investors and the entrepreneurs. Lastly, to answer your last question I don’t why U.S. VC firms won’t invest in Turkey. We try to look into every opportunity that is presented to us.

Barış Karadoğan: All you need is one succes story from Turkey. When you have that you will most certainly see VC’s coming to Turkey looking for more investments.

Aydın Şenkut: I believe Turkey has the skill set. There are a lot of high quality educational institutions. The graduates of these schools usually go abroad for graduate school, and many of them are frequently checking back with the industry in Turkey for possible fits. The problem is not the lack of creativity, either, as Barış said. In my opinion, the lack of role models in the investment community is a major issue. The major players of the industry in Turkey, Koç Holding and Sabancı Holding, both are focused on banking, but these banks may fail to identify the potential of a Web 2.0 application/ product precisely. I agree with Barış, all we need is a couple of good examples. They will fuel the entrepreneurs in Turkey as well as local and foreign investment firms.  

It is important to note here that these gentlemen are willing to help in every way they can the young entrepreneurs in Turkey and in the U.S. They all said they would be willing to spare some of their time if a council or an advisory board were to be formed in Turkey to evaluate start-ups in their early phases. We thank them for their time, their enthusiasm and their willingness to share their expertise.

GEORGE NURAY UĞRAŞ’S LESSON
After receiving my Ph.D. in Applied Physics from Yale University, I arrived at Caltech as a research fellow placed in charge of a research project to build a detector system for an airborne observatory. Our mission was to identify the process by which stars and galaxies form. I was working with some of the best technicians, grad students, and fellow academicians to build a system that would exceed the performance levels of current methods, and to see how far we could push the fundamental limits of physics. With more sweat than genius, the system worked as designed after a few months. We took our equipment to an airbase in Hawaii, which had an airborne observatory in a reconfigured military aircraft. The aircraft had a telescope dish on board and a four-foot hole in the fuselage, which would become exposed during observations. Our team was limited to three days and three flights to get the data we needed - if we failed, our next opportunity was at least another year away.

Day one - shortly after take off, our team quickly looked for a very small spot around Orion in the night sky. The crew (used to working for NASA) informed us that there was a problem with their guidance system and we would not be able to observe on this flight. We returned to base extremely disappointed, as we had just wasted one of our three chances. Day two - tensions mounted as we took off, our eyes focused on the flight crew and their equipment (we assumed that our equipment was always in order). As we started to take data, our equipment failed. A sobering experience for a bunch of academic types not used to failure. We returned to base, knowing that we had one day to figure out how to work well as a team. The chemistry transformed quickly as everyone focused on their piece of the project, trusted others to do the same, and helped each other to get the job done. Day three - we were tense, but ready, as we took off on our third and final flight. Everything went according to plan. We had gathered enough data to confirm the existence of complex molecules in the nebula halfway through the flight.

The lessons learned on those flights are never far from my mind - being driven can lure you into thinking that if you are very smart and work hard you can get anything done. In reality, our destiny often rests on how well we work as a team.

GLOSSARY
Venture Capital: A type of private equity capital typically provided by professional, outside investors to new, growth businesses. Venture capital investments are generally made as cash in exchange for shares in the invested company.
Venture capitalist: (VC) a person who makes such investments.
Venture capital fund: a pooled investment vehicle (often a limited partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks, and other financial institutions that pool such investments or partnerships.