High-Definition Television

In the early 1990s, the United States was losing the race to develop the next HDTV standard. Japan and Europe were leaders, each with its own mixed analog and digital standards. These governments were providing funding in the billions of dollars, and services and equipment were already available on the market.

The United States, in sharp contrast, was a backwater for HDTV and consumer electronics in general. The US government had invested very little in helping develop a standard and appeared to be losing the battle to create it. RCA, one of the last great bastions of US consumer electronics, had been sold a few years earlier to GE under Jack Welch’s leadership; GE then sold all the consumer electronics divisions to Thomson of France. Welch considered consumer electronics a losing business, because it didn’t meet the “top three” revenue and profitability performance levels that GE required.

Then, in a stroke of genius, the FCC, under the leadership of Reed Hundt, declared that the United States would create an HDTV standard and would require any submissions for the standard to be all digital. Given that there had never been proof that HDTV could be delivered in an all-digital format within the available bandwidth, this decision was both courageous and risky. It also would leapfrog all the mixed analog-digital standards being developed in Japan and Europe, because the system had far greater potential by every measure.

In 1993, all the leading competitors—including AT&T, General Instrument Corporation, Massachusetts Institute of Technology, Philips, Thomson, and Zenith Electronics Corporation, led by David Sarnoff Research Center (formerly RCA Labs and now part of SRI)—formed a “grand alliance” to create an HDTV standard.

The successful development of that standard led to hundreds of new HDTV products and dozens of ventures, including companies like DIRECTV, Netflix, Hulu, and YouTube. Beyond the standards, the compression technologies that were invented for HDTV continue to be fundamental to the sharing and streaming of video on the internet.

The Breakup of Bell Telephone

In 1996 the US government forced the seven regional Bell telephone companies to allow other companies to use their telephone access lines. This action coincided with the emergence of the internet as a public service. The internet enabled a new era of interactive data communications for consumers and businesses, with thousands of new businesses being created. We took advantage of this regulation to create a multibillion-dollar company, Covad Communications, that provided consumers and small businesses with convenient, low-cost access to megabit-level data communications.

SanDisk’s Revolutionary Portable Data Storage Systems

Imagine if every time you turned off your cell phone, you had to reenter all your personal data when you turned it back on. Or instead you had to carry a brick-sized battery to keep your cell phone power on even when you’re not using it.

Fortunately, you don’t have to worry about these annoyances because of flash memory devices, an innovation commercialized by SanDisk. These remarkable devices hold their data, even when the system power is turned off.

The cofounder, inventor, and visionary force behind SanDisk is Eli Harari, who was honored by President Obama in 2014 with the National Medal of Technology and Innovation.² SanDisk is one of the world’s leading suppliers of flash memory, with revenues exceeding $7 billion in 2014.

Harari’s vision, in the 1980s, was to make the storage of digital information so easy that people would make computing devices an integral part of their lives. His solution was to replace the widely used magnetic disk data storage with low-cost, compact flash memory devices that would perform the same memory function but be suitable for portable consumer systems (such as digital cameras) and require far less power for their operation.

Harari not only led the invention of the memory system concept but also built a great global company to execute it, established production facilities, led the development of industry standards, and continued to develop innovations. SanDisk generated numerous patents over the years that protected its industry position in the face of growing competition from huge companies such as Samsung. Harari said, “My vision for the product to be offered to the world never changed. What did change were the tactics needed to build a great company that not only was the leader in its market, but at the same time grew profitably.”³

Chips that store nonvolatile data by this technology existed in 1988, but no one had foreseen their capabilities in the applications that emerged over the years, because these basic chips suffered from reliability problems. Notably they could be written and erased only a limited number of times before failing. Harari patented a system concept that allowed these devices to perform like a memory disk for the computer to which they were attached. In effect, the new portable memory system could be moved from computer to computer and work reliably for years of data writing and erasing, overcoming the reliability problem. This is a great example of a system solution overcoming a basic device limitation.

Intuitive Surgical Creates Robotic Assisted Surgery System

The story of Intuitive Surgical, an SRI spin-off, began in the 1980s with the US government’s desire to save lives on the battlefield by allowing surgeons to operate remotely on soldiers in the field.⁴ To address this need, the National Institutes of Health (NIH) and DARPA supported the development of the Da Vinci machine at SRI in the late 1980s. Da Vinci was never deployed on the battlefield, because that environment turned out to present too many difficult and complex issues. But its story shows the creative aspects of new business development in discovering commercial value in technologies deemed impractical by others.

Entrepreneurial surgeons and technologists—undaunted by the failure of Da Vinci to work for its intended purpose—recognized a large market opportunity: to assist surgeons in laparoscopic surgery in the operating room. Laparoscopy—gaining access to the body’s interior via a laparoscope, a thin optical and surgical instrument—was becoming a major trend. Its benefits included smaller incisions, reduced pain, reduced hospital stays, fewer infections, and lower cost.

But learning and using a laparoscope was very difficult; the tools were primitive and highly unintuitive. Imagine a small incision in which a long stick is inserted, with a small scalpel at the end. To lower the scalpel, the surgeon had to raise the stick, as if operating a miniature seesaw with the fulcrum at the incision point. This motion is not intuitive, and it’s difficult to learn. And for every few millimeters the surgeon raised the stick, the other end would lower by a distance that varied, depending on how far the stick was inserted.

Intuitive Surgical aimed to solve this user experience problem. The name itself came from the idea to design the robotic Da Vinci system to function intuitively. The new user experience was a breakthrough. A surgeon would sit at a workstation near the patient and manipulate a robot that would operate the laparoscopic tools. When the surgeon made natural hand motions, the system made the same motions—eliminating the need for the surgeon to make the opposite motion. In addition, the motions could be miniaturized. Thus, when the surgeon’s hands moved a certain distance, the tool could be programmed to move a fraction of that distance. In this way a surgeon could perform minimally invasive surgery with high precision and natural hand motions.

SRI launched Intuitive Surgical in 1994. It has been approved by the US Food and Drug Administration (FDA) for chest, cardiac, urologic, gynecologic, pediatric, and many other surgeries. It is commonly used in hospitals all over the world.

Intuitive Surgical is an iconic example of two market trends—surgical and laparoscopic—converging with technology trends in robotics and microprocessors, and with a value proposition of enabling surgeons to make high-precision, natural motions in laparoscopic surgery. The technology has an immense value in reducing operating time, improving the success of the procedures, and reducing patient pain.

The company is now public, with a market capitalization of about $19 billion.

Covad Pioneers Home Broadband Access

To give ordinary consumers access to the internet in a meaningful, useful way (and thus to tap the potential of the network) required easy access to megabit-per-second digital data communications—a huge problem to overcome. In the early days, institutions provided internet access to academics or researchers, but this left out millions of others who had only telephone line service. Limited data services at very low speeds were beginning to be offered after deregulation, but the user experience was poor, with speeds of only a few tens of kilobits per second.

The 1990s saw a solution for megabit-per-second speeds on copper telephone lines called digital service loop (DSL), based on the invention of new signal processing technology. Level One Communications had developed chips that enabled this capability over distances of a few miles. Together with a group of people at Intel, we perceived an opportunity to create a pioneering company to open a huge new market.

Led by Chuck McMinn, the founding team planned to start Covad Communications to offer broadband access to consumers and small businesses nationally using the new, but still expensive, DSL technology. The Warburg Pincus team of Henry, Joe Landy, and Frank Brochin met McMinn and his small founding team in 1997. We also had the benefit of having a great consultant, Bart Stuck, a prominent Bell Labs alumnus. The plan presented a known important market need (a pressing need for mass-market broadband access), a huge potential market, and a differentiated technology solution—as clear a value proposition as one can hope for. All the parties recognized that making the company a success would require overcoming many challenges.

Although the venture team had many of the skills needed, it lacked experienced communications service management. McMinn, the founding CEO, became chairman of the board and replaced himself as CEO with Bob Knowling, an experienced senior manager from the communications industry, who recruited a talented team of operating executives.

Then there was the expense. The chip sets were selling in the hundreds of dollars, which meant that a modem placed in the home cost more than $1,000—much too expensive for a mass market. But we knew that Moore’s Law would lead to rapid and dramatic reductions in the price of the chips needed in the consumer equipment, allowing Covad to offer a well-priced service (less than $70 per month). Because Level One Communications was a chip supplier, we had confidence in future reductions in the cost of equipment.

There were other concerns as well. Although a new government mandate made available leased copper lines from the RBOCs, the lines had to terminate in a central facility near the subscriber’s home, because the broadband signals would not carry very far. For this to happen, the RBOCs had to make their central facilities available to Covad for interconnections—a kind of cooperation that had no precedent. The RBOCs were not friendly, but Covad added experienced executives who knew the communications regulatory environment and who were successful in negotiating with the telephone companies for access to the offices. Covad also focused on working with various government agencies to ensure that regulatory support was available.

Building this company was costly. Covad required service and computer infrastructure, new software to manage and deliver the service, and new billing systems. But with the huge wave of start-ups focused on communications software, Covad was able to buy the software products and avoid hiring its own sizable development teams.

Funding was helped by the recognition that this market was going to be a major one. Covad was able to attract hundreds of millions of dollars of investment—including an IPO in 1999—because investors wanted to invest in what was perceived to be a huge new market driven by the need for internet access at affordable prices.

But because of the size of the market, Covad was running against the clock. Competition was inevitable, and Covad’s early entry was critical. Serious competition came eventually from the cable industry and the RBOCs themselves when they saw demand surge. But initially the established telecommunications companies were slow to perceive the fast-growing interest in broadband internet access and were generally willing to have Covad deploy its service using their rented copper lines and central office facilities.

Warburg Pincus invested $6 million to fund the start-up of Covad. At its peak the company’s public valuation was about $7 billion. Warburg Pincus realized a profit of about $1 billion from this investment.

Nova Pioneers Credit Card Payments

By the early 1990s, consumer credit card use was becoming popular, growing by about 18 percent annually, but only because bigger merchants were willing to accept the cards despite the associated cost. Most small merchants could not afford to accept credit cards, because the costs were high and processing card payments at the checkout counter took too much time.

An entrepreneurial team of eleven experienced people who had worked in bank credit card operations approached Henry with the idea of building a company, Nova Information Systems, to focus on enabling even the smallest merchants to accept credit card payments. At first view, entering the credit card processing business was unappealing. It seemed that only banks could manage the business profitably, given the need for extensive infrastructure, the cost of merchant support, and the need to meet regulatory requirements.

But this opportunity was different. Nova had an outstanding team whose members represented a complete range of expertise in the business, and, most important, they came with a differentiated technological approach to solving the problem. The technologist on the team had developed a processing software solution capable of being implemented on low-cost computers, avoiding the costly IBM mainframe computers that the banks used. This meant the technological infrastructure could be implemented by Nova at relatively low cost.

The technologist had also developed a clever data communications technology for allowing merchants to use a phone line for voice and data that would be connected to the Nova data center. Using a single phone line may sound trivial, but in the mid-1990s such service was costly for small merchants.

The combination of these technologies meant that processing a card at the merchant terminal would take only a few seconds, a major reduction in time; and Nova was able to offer the service at a lower operating cost than the existing bank processors. This was the value proposition that got the attention of the Warburg Pincus evaluation team.

It’s noteworthy that a single engineer came up with a solution having a profound impact on the industry, one that was already considered mature and was dominated by big banks with huge resources. But this example is far from unique.

After a great deal of analysis of the opportunity, we funded the new company. Part of the attraction to the founders was that our investment firm offered a line of credit of $30 million and an offer to continue to fund the company if certain agreed-upon business milestones were reached. The start-up team expected that this was going to be the only capital needed before an IPO. (Such lines of credit are a valuable method of attracting top entrepreneurs with ambitious ideas.)

Over its investment period, Joe Landy and Chip Kaye, along with Henry, became active participants in all aspects of the company’s strategy. Nova’s ultimate success was the result not only of the technology innovations in a mature field, but also its novel approach to acquiring merchant customers. Instead of approaching individual merchants to sell the service, the company acquired the merchant processing accounts from small and medium-sized banks all over the United States while continuing to have the banks act as sales agents. Small merchants need bank relationships, and banks would provide credit card processing as part of the service. Such processing was relatively costly for the banks, and outsourcing to Nova was a way for them to cut costs while continuing their merchant relationships and getting paid for providing new customers to Nova. In the course of five years, hundreds of banks became Nova partners.

The success of Nova illustrates the importance of identifying mature underserved market sectors where new technologies enable you to build a profitable business by displacing existing products and services. Such markets tend to be overlooked by incumbent vendors—particularly big companies—and are therefore fertile ground for creative entrepreneurs.

The total venture investment into the company was $30 million—the number in the original plan. In 1996, Nova had an IPO on the New York Stock Exchange, and it became the third-largest credit card processor in the United States, with revenues of $1.6 billion in 2001, when it was acquired by US Bancorp for $2.1 billion. Merged with Nova, the name of the bank’s business was changed to Elavon, and it became, through international and US operations, one of the top credit card processors in the world, serving more than one million merchants. Nova CEO and cofounder Ed Grzedzinski became head of the combined organization.

Ness Creates Worldwide IT Resource

Beginning in the 1980s, many countries entered the international marketplace with rapidly growing commercial and industrial capabilities. One fundamental need in all countries was to implement modern information technology into their enterprises. Particularly, the need was for expertise in selecting, installing, and managing sophisticated enterprise computer and communications systems. No two enterprises are the same, so the skill and expertise of the IT professionals were critical. Customers looked for the best performance and lowest cost of delivery. Such experts, in short supply in the 1990s, were usually hired on a contract basis. Working with partners Joe Landy and Frank Brochin, we analyzed the opportunity for funding Ness, a global IT service company in Israel.

The opportunity offered by the global market need for high-quality IT services was not a secret. Many Indian companies were in the market, but Israeli company Ness Technologies set out to differentiate itself on the basis of high-quality skills and technology that could be available globally.

We were introduced to Raviv Zoller by a local investor in Israel who got the ball rolling in 1999. The Hebrew word Ness means “miracle,” and we recognized that to build the company we wanted, it would require more than ordinary good luck. Zoller was an accountant by training and very entrepreneurial, and he had the vision of building an international company. He had a wide-ranging knowledge of the IT sector and knew the people involved in Israeli companies that were likely candidates for acquisition.

The vision of building an international IT service company required a base of existing companies, because it takes a long time for a new company to build a customer base and market credibility. The most difficult part of starting Ness, Henry discovered, was to consolidate several small, local companies into a cohesive business, find a CEO, and put in place an organization able not only to operate in Israel but also to address the world market in countries that offered the best prospects for business growth. Zoller left his own investment banking company to assume the position of CFO of Ness, and we recruited as CEO Yaron Polak, an experienced IT professional with previous CEO experience.

As we consolidated the company and it started to expand outside Israel, it became obvious that Ness needed to acquire local organizations internationally to gain a foothold. No matter how talented the Israeli technologists, there was a great deal of reluctance to hire Ness because enterprises liked the idea of a domestic contractor. The good fortune was that we had previously made investments in IT service companies in the Czech Republic (led by Bill Janeway) and India (led by Chip Kaye), both of which were still small. These companies were merged into Ness.

As we merged companies into Ness, the service delivery strategy for international customers was to use local engineers supplemented with Israeli experts for implementation, who came in specifically to complete contracts. The effect on local business was dramatic. The Czech Republic entity grew from $20 million in annual revenues to more than $100 million as it expanded services into Hungary and Romania, as well as locally, on the strength of strong management and access to new technological skills.

Raviv Zoller eventually became CEO, replacing Polak, and accelerated the international expansion. Zoller focused on recruiting senior managers from the regions where the company operated.

Ness had an IPO of its shares on NASDAQ in 2004, and it reached a public market value of about $500 million and revenues of $475 million before it was acquired by Citicorp in 2008.

To create a great company, you need to identify the market trigger points and pain points that offer opportunities for massive transformation. Having done that, how do you find and hire the team members to realize your vision? We look at that next.