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'Learn by doing' pays off for Sutter Hill The firm manages US$400m from its partners and from universities such as Yale, Stanford and Princeton. It has had a 36% compounded internal rate of return for the last 31 years VENTURE firm Sutter Hill's approach to investing in Asia is typical of the Silicon Valley pioneer's belief in having firsthand experience of what it is putting its money into. On the surface, the 39-year-old company's strategy for Asia seems so practical as to be almost banal. Len Baker - one of its seven managing partners, here recently for the TechVenture Conference - told BizIT: 'What we're doing in Asia is to develop a few high-quality relationships with those on the ground. As soon as we see opportunities we like, we'll invest with local partners.' These partners now are India's Indus Ventures Management and China's Chengwei Ventures. 'We haven't made any investments in Singapore, but Venture TDF in Singapore is another strong group,' he says. Work through the generalities however, and one discovers a deep coherence in the firm's investment philosophy, best summed up perhaps as 'learn by doing'. As the bottom falls out of stock markets worldwide, the nominal nature of the last few years' returns is fast becoming apparent. Privately-held Sutter Hill, which manages US$400 million from its partners and universities such as Yale, Stanford and Princeton, has had a 36 per cent compounded internal rate of return for the last 31 years. Its investments include stakes in PDA giant, Palm Inc; graphics chip maker, nVidia; and data storage company, Network Appliance. 'We made 500 per cent annually once, and I'm thankful to the last three years for the fatness of my wallet,' Mr Baker joked. 'But it wasn't fundamentally what we do, which is to build real businesses in the real economy.' The abundance of cheap financing actually retarded the development of the Internet, by letting businesses survive on capital instead of revenue, and causing a mis-allocation of talent and resources, Mr Baker says. 'The bursting of the bubble brought people back to thinking about micro-economic issues of running a company, rather than playing in broad trends for financial results.' When pressed to predict promising sectors, the answer is reached less through technical analysis than the minute observations he consistently espouses. 'If you think of our daily experiences - at an airline counter, on the phone - when we're handled properly, we feel tremendous loyalty, and we buy...if you watch an evangelist for the idea to put a sales proposition to someone with an actual problem, what you see is something real. You have much more information about the market that way than through statistics.' 'A lot of great decisions that get made in Silicon Valley are highly intuitive and subjective,' he said. This successful formula, however, cannot be duplicated exactly. The Silicon Valley model grew out of a specific set of conditions, and the problems in Asia - the lack of management in China, Singapore's distance from large markets - are different, he points out. 'What we can say now about how these problems will be solved is that out of hundreds of startups, one will succeed, get copied and built on. Just like bacteria swap genes.' At the heart of Sutter Hill's philosophy is this: 'Innovation is the thing you can't anticipate. If you try to make an a priori decision about what to do, you miss a lot of interesting things. Similarly, developing entrepreneurial companies is fundamentally different from other kinds of planning. All you can do is create the right environment, have good people, the right incentives, and you leave these people to figure it out.' What Silicon Valley does better than anywhere else is to fail, and to fail efficiently, he says. 'The only way to find out what works is not through planning, but experiments, most of which will fail.' And unless individuals dare to initiate experiments, they will not feel responsible for them. 'An ownership culture is very different from a bureaucratic one. Bureaucracy creates a separation between the bureaucrat and the consequences. An ownership culture, on the other hand, is where you have real money on the line, and participation in the loss.' Critical to the level of enterprise in an organisation are cultural perceptions of risk. 'If you operate in a large centralised organisation, the political cost of failure - like the cost to a person's career - is often much greater than the economic cost. Silicon Valley is a place where the political cost is very low.' Preserving the status quo may reduce the risks of failure, 'but it's an illusory comfort', he warns. 'In the long run, the strategy to minimise risk is the riskiest strategy there is, because it doesn't adapt.'
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