Stillwater Capital, LLC

Every so often I like to take a deeper dive into a subject of enough interest that it’s worth the time for the extra cup of coffee or properly crafted glass of fermented grape. The story of Silicon Valley, its early days, is one of those stories. The investment implications that have come from the place, and have changed peoples lives, have special meaning. From 1976 to 1990, I was there and had a front row seat to a Camelot era. Or at least one of its first of many Camelot eras as it’s been a right tail life for a long time in the Bay Area, especially the southern confines.

 round building in center of valley

And that reality isn’t going away anytime soon, valuations be dammed. Do get long, stay strong, ride the wave to riches. Everyone else is doing it. Just watch out for the once in a decade bear market where everyone loses their minds, and fortunes. Every boom has it's  bust. This is California after all, we’ve been doing it since 1849.  


There it stood, a quiet little ag valley forty miles south of the big international port of call, San Francisco. Oak and grass hills washed out into an expanse of perfectly lined fruit and nut orchards. In the springtime, the trees would be lit with blossoms of every soft pink and white hue in the spectrum.


Every ten miles or so there was a ranch house, always painted white, sometimes brought from as far as away as the East Coast, shipped in pieces around Cape Horn. This one being the Wright Ranch house, built in 1862, which was at the center of a large 300-acre cattle and feed operation in Sunnyvale.


As the seeds were sprouting fruit a few miles south, the biggest and most fruitful seed took root in 1885, growing out of a gift from a father to a son who had died the year prior from typhoid. That son was Leland Stanford Junior, and the tree Stanford University.


From that mother tree would grow one of the greatest engines of economic growth ever known. This is how the University describes those early days in the 1930s and 1940s where inventions that would later change the world were developed.

Engineering Professor Frederick Terman, dubbed the “Father of Silicon Valley,” left his stamp by encouraging Stanford students not only to develop but also to commercialize their ideas. In 1937, physicists Russell Varian, Sigurd Varian and William Hansen developed the klystron ultra-high-frequency vacuum tube, paving the way for commercial air navigation, satellite communication and high-energy particle accelerators. In 1939, graduate students William Hewlett and David Packard developed the precision audio oscillator, first low-cost method of measuring audio frequencies, and spun it into the company now known as HP. In 1951, the university developed its Stanford Research Park to house firms led by such innovators. Varian Associates became the first tenants

For some reason, we were big on garages. This one, dubbed the ‘Birthplace of Silicon Valley’, is where Bill Hewlett and David Packard began their electronics tinkering that would lead to the founding of Hewlett-Packard.


And this famous one, walking distance to Homestead High School and the Pacific Steamer Pizza Kitchen, is where two shaggy-haired California dreamers would change the world while founding Apple Computer.


Steve Wozniak did throw some shade on the myth of the ‘Apple Garage’, saying no actual production took place there. But never let the truth get in the way of a good story. This is what it looks like today. If not for the ‘NO TRESPASSING’ sign, you would never guess that something of consequence took place inside.


Let’s pause for a second to think about this. Everything described above took place within a ten-mile radius. You could literally ride a bike from the garage in Cupertino to the heart of Stanford in about 30 minutes time. Draw one more line on the map down to Mountain View where Google is headquartered today, and it would be tough to argue that this isn’t the Cradle of Technology civilization.


While it’s still called Silicon Valley, much of the production of today’s semiconductors is done overseas in massive fabrication facilities with no name of note on the outside except a series of letters. The biggest one of them all is Taiwan Semiconductor, or TSMC. But not all low-cost locales are in Asia. This a future TSMC fab is in the American desert outside of Phoenix, Arizona and will open for business in 2024.


In my twenty-five years on Wall Street I spent exactly one day inside semiconductor fabs, but what an incredible day it was. Our host was Jefferies, and the investment bank had just hired the semiconductor banking and analytical team from Morgan Stanley. They shuttled us from one non-descript building in Milpitas, Santa Clara, and San Jose to another. The engineers started to explain how these were 30 layers being etched on each slice of silicon wafer. And we all stood in awe.


As it relates to semiconductors and investing, what a long, strange trip it’s been. Twenty years ago, there was a thing called the ‘semiconductor cycle’ and it followed the flow of the personal computer cycle. First in the corporate environment, and later into personal computers. The hottest part of the market would be the emerging world of laptops.  


Ten years ago, PCs would become an afterthought to networking chips. And today, it’s an amalgamation of chips that power cell phones, networking equipment, servers that power data farms and crypto farms, and gaming chips the hips kids need to plug in and check out. Had you seen that mix of computing was no longer cyclical, but secular, it would have earned you more than twice the return of the broad market. Higher beta for sure, but much higher return as well. The semiconductor index (SMH) is in red, the S&P 500 (SPY) in blue.  


Just as my parents had split up their marriage years earlier, they split up their professional focus as well. On the one hand my mom would use her math degree and apply it to software. My dad, applying his journalism skills, went into public relations in hardware, disk drives, and semiconductors. He would make his money late in his career running PR for flash memory devices for SanDisk, founded by flash memory pioneer Dr. Eli Harari. This was Eli receiving his National Medal of Sciences and Technology award from President Obama. Side eye from the Leader of the Free World never gets old.


One great story, among many great stories from that time, was when my wife was walking into a Costco and passed the Sandisk sales display with hundreds of memory cards with a future as removable zip storage. Erin looks at the display and says to the boys, ‘Look, that’s grandpas’ company’. To which a fellow shopper asked, ‘You mean the whole company?’. Of course, it wasn’t, but during the few seconds in between the question and the answer, we were billionaires.


So as dear ol’ Dad was hammering away in hardware, mom was figuring out the world of ones’s and zero’s.  Which in its very basic form, is the digital language that all things speak.  With a math degree from the university of Montana, Cobe Chatwood, would become a trailblazer in her field.  The movie rights to this story are still avaiable, inquire within. Standing offer for Juila Roberts to play the lead. 


The first real gig we can remember her having, was at Four-Phase Systems, a software company in Cupertino, CA.  The land on which it stood would eventually become Apple’s headquarters.  Highlight for my brother and I, was leaving the annual Christmas party with stacks of programming punch cards that we would use to turn into small cities and towers in our garage. 


After bouncing around at a few smaller shops, Mom would finish her career at Oracle, where she would run large scale implementations of their database software, the biggest of which, was for Stanford University, the same school Oracle founder Larry Ellison graduated from.  Part of the job at the time was to report to the Stanford Board of Trustees, which included Brad Freeman, and Condoleezza Rice. Nice work if you can get it.


  With Microsoft a thousand miles north in Seattle, the larger and more relevant software companies in the Bay area would grow off the Oracle tree.  Companies like Siebel Systems, which Oracle would acquire, and Salesforce became dominant business tools that sat on top of massive databases that needed managing. 


  Social media companies, such  as Facebook emerged way past my time, but I have one story of note about Google which gives you an idea of how connected these worlds are.  At some point in 1998, a bunch of parents and now us older kids, were standing in our front yard talking in Sunnyvale, and one of the more connected dads, Jack Shanahan, made mention of two young guys starting a new search company out at Stanford, and we shook our heads and said, ‘This is going to be big, isn’t it?’, and those two guys were Larry Page and Sirgey Brin. And the rest is life changing money history. 


In terms of the best racquet in town, aside from being a founder, was the venture capital ecosystem that grew on Sand Hill Road.  The original players were, Kleiner Perkins and Sequoia, and later would be joined by Accel, and Andreessen Horowitz.  And when we say racquet, we truly do mean an exclusive group that controlled everything with ties that were impossible to both unwind or understand.


Let me be clear, when I say racquet, it’s the racquet we all desperately wanted to be a part of.  Some of the more outspoken critics of late, and those with insider purview, have pointed out that there is a Ponzi scheme aspect of this, where the mantra being, ‘I’ll do your deal if you do mine’, just as long as there is an ‘exit’, and we all make a shit-ton of money.  If Sand Hill was the cocaine factory, Robertson Stephens, Montgomery, and Hambrecht and Quist were the dealers.  These were the power three investment banks from 1990 to 2010, at which point they all got gobbled up by hungry white-shoe firms on Wall Street.  But in their day, it felt like the party would never end.  And those that Montgomery threw, were the stuff of legend. As was Thomas Wiesel, their kingpin. Here he was, hubris on full display, with his good friend Lance Armstrong after winning the Tour de France. 


In terms of how we all fared, we being the four or five classes ahead and four or five classes behind at Homestead High school, there were no guarentees. Just drinking from the same water fountain as Steve Jobs would not guarantee future riches, the point being, just because we were born and raised in the land of milk and honey, doesn’t mean today we are reaping all the benefits. And I consider myself an Exhbit A kind of character. From 1996 until today I've chased, and sometimes found, hedge fund riches. But those days are largely in the reaview mirror, as are the boom days of 2% and 20%. Meanwhile, they are still changing the world up here in Silicon Valley. Not so much in the land of performance money.  


The reality is, those that I know who made it big, wound up in biotech as doctors, or in finance. Many of us joke, but not in a joking manner, we are all going to make our money in Silicon Valley real estate, mainly from the houses we all grew up in that now trade for millions. In this case, $3,000,000 on Rembrandt Drive in Sunnyvale. And trust me, these are not large homes by any means. We are talking 1,800 square feet...maybe. But as they say, real estate is all about location, location, location. 


As a lover of ethnic food, Santa Clara County is now home to one of the most magnificent cornucopias of culinary dialects known to man.  From north Asian Himalayan to the African cuisine of Ethiopia, the food is truly something to behold and enjoy.  Step inside an Indian market, or weekend farmer's market, and you may have well just traveled to Dehli.


It’s tough to say, ‘and that concludes our tour’, having left off hundreds of stops worth making, but for now, this will have to do.  I’m trying to shake down the powers that be at Stanford to turn this into an oral history seminar. All I ask is that my classroom be the beer garden at Rossottie's, and my compensation be an Alpine burger, and a couple of Herradura Silvers