Thar's Gold in Them Thar Hills!

Way back in 1849, prospecting for gold in the San Francisco hills was a pure numbers game. Today, thousands engage in the same gambit, but the game is coached in Silicon Valley-Venture Cap jargon.

by Dave Lim, 1999.  (This is one of a series of articles published by CNET that I wrote while I was living in Silicon Valley during the first Internet Revolution in the late 1990s.)

"Thar's GOLD in them thar hills!" This was the singularly most heard cry on the lips of the floods of immigrants who came from all over the world in a fevered, mad race to find untold and undiscovered wealth amidst a barren, sun-bleached range of Californian hills which is San Francisco Bay today. History has nicknamed these fortune hunters the "49ers", for 1849 was the year of the "Gold Rush" when 100,000 prospectors descended into the San Francisco Valley after gold was first discovered in the foothills of the Sierra Nevadas. Today, the spirit of these pioneers lives on in San Francisco's football team, who are called the "49ers".

The "Technology Gold Rush" of the 1990s is no different. Prospectors are still lured from distant corners of the world. However today, modern technology enables them to be transported here at supersonic speed, in air-conditioned comfort with in-flight service and the latest Pixar movie en route. Like their counterparts a hundred and fifty years before, these prospectors have packed their hopes and dreams and have come well-equipped - not with picks, shovels, or lanterns - but with armfuls of postgraduate degrees in computer science, electronics, engineering, and business.

Way back in 1849, prospecting for gold in the San Francisco hills was a pure numbers game - The more claims a prospector staked out and the more funds he could scrape up to mine those lots, the greater the odds he had to "Strike it rich!" The trick was, of course, not to run out of money before finding gold. Today, thousands of entrepreneurs and their financial backers, the venture capitalists, engage in the same gambit, but the game is coached in Silicon Valley-Venture  Cap terms

The most important word that a start-up company learns here is "Burn Rate", the rate at which it spends its available capital. The trick is the same today as it was in 1849: Don't go bust before striking internet gold. Like financing the construction of a mine on a newly-staked lot, no one, not the miner nor his financial backers, really knows for sure what prospects a new venture holds. In this game of odds, if you have 10 gold mines, all it takes is one to strike that elusive gold lode.  The other nine could yield nothing but dirt, but you would still become rich beyond your wildest imagination.

Here are the real odds in today's terms: A typical Silicon Valley venture capitalist (VC) meets 1,000 prospectors a year, each claiming to have a unique and usually, secret formula which would enable them to find gold with the aid of the VC's money of course (that's about four business plans a day). In the end, the VC usually decides that only six of these potential gold mines (0.6%) are worth funding, and on average, only 10% of these funded mines actually hit gold, the rest discover dirt. The VC shrugs off these failure and goes off to hear more proposals from yet another four prospectors.

You, the entrepreneurial miner, are left virtually penniless and disheartened, until you can screw enough strength and courage to go through the entire process of finding another financial-backer to enable you to sweat it out, day-in-and-day-out down in the mine again. Entrepreneurs will tell you that it can be an extremely lonely existence. Among those fortunate enough have a spouse, the news doesn't get any better: A recent survey found that the divorce rate among Valley entrepreneurs was 26%!

For a Silicon Valley startup, discovering gold in a mine is equivalent to reaching the IPO or Initial Public Offering stage. For the VC, this marks the end of his financing role. It's time for his "exit strategy". Your business of mining the gold, however, still continues with additional money from the public. If your company seeks public monies through an Initial Public Offering (IPO), you issue a document to your potential public investors explaining your business and outlining the main risks. It seems that the past casts long shadows into the present: This document is called a "prospectus".

Discovering gold in your mine and then getting IPO funds to enable you to continue mining is not the end of risk for you or your new financial backers. No one knows how much more gold can be extracted and for how long more: Your next pickaxe swing may reveal mere rock instead of gold, rival gold miners may sabotage your mine, and in your haste to expand and exploit your mine before they do, you may inadvertently build poor supports and end up collapsing the mine yourself. These metaphorical risks have their real world equivalents in the fiercely competitive environment that all companies operate in today. To reduce them, you could seek strategic alliances with larger 'gold mine', or you could merge with other smaller companies to combine strengths or to overcome your mutual weaknesses.

If you don't have the nerve and the shear gut determination to be an  entrepreneur or prefer not to get dirt beneath your fingernails, you can be an investor instead. Today, capital races around this wired planet and spans oceans at a click of a mouse. One need not even have to be physically present to be able to finance the IPO gold mines of the Internet. But as I sit here now in the heart of the high tech gold fields the world calls Silicon Valley, I realize that armchair investing from halfway around the world just wasn't satisfying enough.

This year, Immigration Department issued twice as many H-1B  professional visas as they did last year, enabling 110,000 high tech prospectors to work in the Valley. Curiously this is the same number of immigrant gold prospectors who came here exactly a century and a half ago. As they say, "History repeats itself". Perhaps, history will refer to us high tech dream-seekers of the late 20th Century as "the 99ers" and perhaps, we will also be remembered for our hopeful cry, "Thar's Internet Gold in them thar hills!"