Reading, writing, quarterly results

In Silicon Valley, venture capital has become a required subject -- even for fourth graders.


Mark Gimein
October 13, 1999 8:00PM (UTC)

Jonathan X -- I use only his first name because to reveal his full name could sabotage his ambitions -- has lived in San Francisco for two months. He works at a small investment banking firm. And he is itching to meet venture capitalists.

"Next week," Jonathan says, "I'm going to a party that Steve Jurvetson will be at," naming with reverence a particularly high-profile specimen. He networks with venture capitalists by playing online games (all venture capitalists are known, practically by definition, to be furiously competitive at all games). He is familiar with all the bits of trivia about venture capitalists. He knows, for instance, that every year all the venture capitalists in Silicon Valley -- at any rate, all the ones who matter -- congregate for a soapbox derby, barreling down an infamous slope on Sand Hill Road (the Boardwalk and Park Place of the species) in makeshift four-wheeled contraptions, showing off their engineering chops and proving, once again, that Silicon Valley is really about a bunch of guys having fun.

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Jonathan is excited about the kinds of things that venture capitalists get excited about. When he buys something online and he gets the wrong shipment, he does not, as most people would, curse the Internet; instead, he starts talking about the unrecognized business opportunity in customer service outsourcing.

What has brought Jonathan and me together is a class called BizWorld, or, as it's more formally called, Tim Draper's BizWorld. BizWorld is a class in how the business world works, or at any rate in how a particular vision of the business world works: that of a venture capitalist like Tim Draper himself. It's a class designed for fourth-grade kids.

For purposes of a training session for BizWorld's volunteer instructors, Jonathan and I are both members of the Blue Chips. We, the Blue Chips, are locked in the throes of a vigorous competition with the Yellow Jackets and the Green Lights to corner the market on friendship bracelets. Friendship bracelets -- those twirled strands of twine you make as elementary school projects: You put one on your wrist, and your friend puts an identical one on his wrist, and it means you're friends forever, except that the bracelets come off in the shower about three days later and lose whatever meaning they had.

I believe that we are the most high-powered group of friendship bracelet-makers ever assembled. Around the table with Jonathan and me are Georgette, a recent graduate of the UCLA business school; Jeff, a longtime software industry executive and "entrepreneur in residence" at a leading venture capital firm; and Liz, a coordinator of school volunteer programs. Georgette is president of the Blue Chips, Jonathan is vice president of finance (he had originally chosen the card for vice president of manufacturing, but surreptitiously changed it), Jeff is responsible for marketing, I rule the design department and Liz is vice president of advertising. All of us together are responsible for actually making the darn things, and at this we are all more or less equally inept.

If it had been up to me, we would all be fired on the spot, but it looks like we will be allowed to stay. Jonathan and his fellow volunteers might not be any good at making friendship bracelets, but there is one thing that's more important: an unbounded enthusiasm for disseminating the Gospel of the Silicon Valley Start-up through the nation's elementary schools.

Like most ideas in Silicon Valley, Tim Draper's BizWorld has a creation myth, a dramatic moment at which a creator (Tim Draper) is confronted with a problem and hits upon a solution. In this case, the problem was his daughter, then in third grade, asking Draper what he did for a living. Having a 9-year-old ask what one does for a living is a distinctly uncomfortable circumstance that most people with white-collar jobs find themselves in at one time or another, and when the 9-year-old involved is one's own daughter, answering "I move around a lot of papers and look at a numbers on spreadsheets" just won't do. Most parents manage to muddle through to an answer in one way or another, but few approach the problem with Draper's degree of dedication.

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Draper responded by creating a short class in business. He expanded it when his next daughter reached the third grade, then began teaching it in his local elementary school, and finally created a non-profit organization that would formalize the curriculum and speed the dissemination of knowledge about management practices and capital formation throughout the nation's elementary schools. Volunteers now teach the BizWorld classes in about 100 California schools, and the list is growing.

The BizWorld class runs four days (would-be instructors run through a much-accelerated version in training) and is centered on the efforts of the students to make and market friendship bracelets -- the friendship bracelets that the adult volunteers in my own group had so little luck manufacturing. The kids spend four days learning about things like the differences in industrial processes (yes, the kids get to choose between setting up an "assembly line" or a "job shop," bless their tired little hands), and the fine distinctions between the jobs of the vice president of marketing and the vice president of sales. It is likely that unless their parents are themselves bankers, venture capitalists or perhaps factory foremen, they will be at least as stymied by the curriculum as the children. (In fact, Draper says that while kids tend to pick up most of the course, adults often have a lot of trouble.)

There's nothing unique about teaching elementary school kids about business in a rudimentary way. But there is a twist here: the venture capitalist.

In the real world today, there is one overriding reason venture capitalists have garnered an ever increasing amount of attention: they make a lot of money. That's what gives venture capitalists sex appeal -- or at least the kind of business-world sex appeal that leads Jonathan and thousands of bright eyed young bankers like him to thumb through their Rolodexes in the hope of finagling an introduction or two.

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Every year over a million businesses are started in the United States. The vast majority are funded with personal savings. Others are funded with bank loans, with loans from friends, or as often as not with second mortgages or maxed-out credit cards. A much smaller number -- 854 so far this year, according to the research firm Venture Economics -- however, are started in a different way, the Silicon Valley way. In the Silicon Valley way, an entrepreneur with an invention, a strong resume, a brilliant new marketing plan or sometimes with just a lot of chutzpah goes to a venture capital firm and effectively sells the venture capitalist -- the first investor -- a share in the as-yet nonexistent company.

The Silicon Valley way of starting a business is of fairly recent vintage. The first professional venture capitalists started out in San Francisco in the 1950s. The biggest and best known firm, Kleiner Perkins Caufield and Byers, started in 1972. It was KPCB that first settled on Sand Hill Road, the characterless strip near Palo Alto, Calif., that -- thanks to its proximity to Stanford University and the availability of big blocks of office space many years ago (it has since become some of the most expensive office space in the U.S.) -- became the informal headquarter of Silicon Valley's "VCs."

If you were to develop a class that was intended to teach your daughter what it is that you do at work, it is likely that you, too, would feel a temptation to make yourself the hero of the enterprise. After all, it wouldn't really do for Draper, himself a professional VC, to develop a class in business that mirrors how most businesses are really started and does not include venture capitalists. So just as in the Silicon Valley game plan, right after the students in a BizWorld class have "incorporated" (paying one "KidBuck" for the privilege), the venture capitalist enters the scene.

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"What's a venture capitalist?" Draper asks a classroom of kids in a video used in the volunteer training. "Someone who has money to invest in start-up companies like yours." Most classes, of course, aren't lucky enough to have Tim Draper himself teach -- so the role of the venture capitalist falls to the regular teacher. (Many entrepreneurs will find it deliciously accurate that BizWorld volunteers are also told to leave discipline to the venture capitalist/teacher.)

In return for incorporating, each team in the BizWorld class gets 10 shares of stock. The problem is that they have no money for their business. Thus each team -- or, more precisely, each vice president of finance -- goes off to the venture capitalist and pitches the merits of their start-up friendship-bracelet company. The teacher listens to the pitch and doles out money in exchange for the stock.

The process, in fairness to Draper, is an eerily accurate reflection of real-world practice. As we go through the game in our volunteer training class, our own instructor, Joyce, explains, bluntly, "You're trying to get as much money for your stock as you can, but the venture capitalist is trying to give you as little as possible." As a bonus concession to accuracy, when teams run out of money, they can go to the venture capitalist again very soon afterward -- but then the venture capitalist, who in this case has them by the scruffs of their figurative necks, gives them a lot less money for their stock. Little things like that reassure you that Draper does have a sense of humor about his profession.

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If it sounds to you like the class might be getting into an astonishing degree of financial complexity for fourth and fifth graders, this is just the beginning. You haven't seen the corporate balance sheets that the kids fill out each day ("The first forms we developed looked like IRS forms," BizWorld's executive director, Celeste Huffstutler, quips; alas, they still do, though in all fairness they're closer to the 1040 EZ than the 1040 A). And it certainly doesn't even give a hint of the complexity of the final wrap-up -- in which the teams, having finally manufactured their bracelets and sold them in a classroom bazaar, learn to value their company.

Finding the company's value, in BizWorld, is no simple matter: First, students look at gross sales, 10 times profit and remaining cash on hand, and pick the biggest of the numbers. Then they get to calculate their value per share, and finally calculate the number of shares that remain in the founders' hands to arrive at a team value. Even the adult volunteers found these calculations daunting. Moreover, this peculiar value -- the nominal value of the stock at the end of the bazaar -- is truly meaningful only in the context of a much bigger market economy populated by professional investment analysts to whom notions like multiplying profits to get a "correct" value for a company are fodder for reams of investment reports. The only part missing from the model is the IPO; since it's fairly clear by now that thousands of professional investors have little idea of how the IPO magic works, that's probably a good thing.

This all may seem preposterous, because it reflects how only a tiny proportion of the business world works. But that misses a big part of the point. School curricula have always been a primary battleground where educators, politicians, and everybody else who cares enough to attend a school board meeting have fought over their visions of how the world should work. Seen as a picture of how business runs, BizWorld might be preposterous. But that's not really what it is. Implicit in the BizWorld lesson plans is the idea that Silicon Valley, along with its peculiar customs and practices, is our economic future. This is the vision to which Draper -- and most of his fellow venture capitalists -- clearly subscribes.

"My vision of the future," says Draper, "is that we become an equity economy. Here in Silicon Valley you can start a business, you can get your ads, your public relations, your lawyering, your banking with equity. That's cool."

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The returns that top venture capital firms reap can be enormous. According to Venture Economics, which tracks venture capital returns, the one-year gain for early and seed stage funds for the year ending March 1999 averaged 33.7 percent. But that tells only a small part of the story. Tim Draper's own group of funds, Draper Fisher Jurveston, has averaged triple-digit annual returns since 1995. And that's not the very top of the range -- thanks to just one investment, in the on-line auction house eBay, the returns of the one new fund, Benchmark, were well over 1,000 percent in one year.

These are extraordinary numbers, but in Tim Draper's world they make sense, because it is venture capitalists like him who are the engines that make the equity economy possible. By a standard definition, in the real world, a venture capital firm is an investment fund that invests money in growing privately held companies. But for Silicon Valley the really interesting VCs are the one who put in "seed" money to start a new enterprise.

In real life, as in Draper's BizWorld, venture capitalists in essence declare by fiat that some proportion of a company that does not exist is worth a lot of money. In BizWorld, the venture capitalist will buy two shares for ten KidBucks a piece; in the real world, Tim Draper might buy 20 percent of an idea for $10 million. The founders of the company, in turn, can turn around and say that their company, which does not yet exist, is worth $50 million. And they can give out stock with abandon to their lawyers, their PR agents, their employees and even their landlords -- all on the power of the venture capitalist's imprimatur and the hope that some time, somewhere, it will all turn into real money.

From outside Silicon Valley, this looks like a very strange sleight of hand. Going to a venture capitalist with an idea and asking for money -- money that, unlike a bank loan, does not have to be paid back if the resulting business flops -- is very much a local custom.

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In Silicon Valley, when someone gets too close to believing their own propaganda, it is often said that he is "drinking the Kool Aid." Certainly, anyone who tries too hard to teach grammar school children about the business world and starts off the lesson by saying, "First you go to a venture capitalist," is drinking a little of the Kool Aid. But then, all of Silicon Valley has sipped the Kool Aid, heard the venture capital gospel and sung the hymns of the equity economy.

Says Draper: "People in Silicon Valley would rather take equity for a cheeseburger than Federal Reserve notes." The weird part is that he might be literally right. The rest of the economy may just be catching up.


Mark Gimein

Mark Gimein is a staff writer for Salon Technology.

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