Despite his strong history in the Valley, however, the earthy Irishman wasn’t a tech guy. He was a lawyer. Wilson Sonsini had become a tech powerhouse after he left, and he hadn’t spent much time on economic issues during his stint on the Hill. This needed to change, thought Reid Dennis.
Unsurprisingly for someone who’d been organizing the Valley VC pack since the start, Dennis had been among the first to join the NVCA. Before too long, he’d serve as the organization’s president. And, being in the home of silicon chips, he had a clear view of another looming high-tech threat: Japan. While America was stagflating, the Japanese government was pumping up its economy, including making major investments in semiconductor R&D. Under their swagger, Dennis could tell that his politics-averse friends in the chip industry were getting nervous.
Everyone knew everyone in the intimate world of the early Valley, but Reid Dennis had known Pete McCloskey for an especially long time. They had been Stanford classmates two decades earlier; they were longtime Woodside neighbors. So he decided to invite the congressman—and a few other old friends—over to dinner to talk politics.21
The shambolic swap meets of Homebrew were happening only a few miles down the road as the dinner party gathered around the candlelit table that warm California evening, but the contrast could not have been starker. Instead of mop-haired engineers with motherboards, there were millionaires in sport coats, all staring down the evening’s guest of honor. Intel’s Bob Noyce was there. So was Tom Ford, the real estate developer who was in the process of turning Sand Hill Road into the premier address for venture capitalists. The one card-carrying Democrat among the guests was Mel Lane, a lifelong Californian and publisher of Sunset magazine, whose glossy pages had brought the sun-drenched postwar California lifestyle to a national audience. The only woman in the room was the host’s wife, who quietly glided around replenishing wineglasses and bringing in new dishes from the kitchen.
Four decades later, McCloskey still hadn’t forgotten how quickly the dinner-table conversation turned confrontational. He needed to stop hugging trees and protesting wars from the backbench, and start behaving like “a businessmen’s congressman.” The tech industry needed tax cuts. They needed less regulation. They needed help competing with Japan. What they really needed was a reality check, McCloskey thought. “I’m a Republican in a Democratic House,” he snapped. “I’m not on any important committees. Everyone in Nixon’s world wanted to put me in jail.” He paused, looking at the unsympathetic faces around the table. There really was only one thing he could do to help them. He could introduce them to his friends who had more-powerful committee assignments, and he could help them learn the ways of Washington.22
That combative first dinner party was the beginning of a new push—this time by the company CEOs themselves—to get Washington to do something about tech’s bottom-line problems. Many of the executives around the table swallowed their laissez-faire distaste and began shuttling east to Washington, just like David Morgenthaler had, to lobby personally for policies that could ease the capital crunch and help tech grow.
WEMA established a “Task Force on Capital Formation” and tapped Ed Zschau to run it. After its 1969 founding, Zschau’s System Industries had grown into a $17-million-a-year business. It helped that the former business-school professor could tap his old students for capital, and this gave the company the cushion it needed at the start of the lean years. But it became harder and harder to attract new investors to give him the capital he needed to keep it going. He licensed some of the technology he developed to Japanese firms, but even that wasn’t enough. In 1974, it took him six months to raise $750,000. “We were thirty-six hours away from bankruptcy,” he recalled.23
Zschau hadn’t been particularly engaged in politics before, but his company’s near-death experience had given him political religion. He also had an academic’s appetite and aptitude for research, and developed a punchy four-page white paper making a case for the job-creating power of high-tech companies. Zschau soon had company; another candlelit dinner produced a lobbying group specifically for the Valley’s chipmakers: the Semiconductor Industry Association, or SIA.
Even though he and Reid Dennis now worked side by side, Burt McMurtry didn’t attend any of these dinners. He was as willing to pitch in for the industry as the next guy, but he thought his business partner was wasting his time. The market was bleak, but there were signs that it would rebound. One of the brightest signs was ROLM, a company that his old partner Jack Melchor had seeded and nurtured since its founding in 1969.
McMurtry was closer to ROLM than to any other company in his portfolio. The connection was personal—the firm’s four young founders were members of the Rice Mafia, three of whom had worked under McMurtry in his final months before becoming a VC. The fourth was someone he’d tried to recruit. ROLM stood out among its peers for the diversity of its product line: its early marquee products included a “rugged” field-ready minicomputer for the military and the first fully computer-controlled telephone exchange. (Venturing into telecom-hardware territory was particularly gutsy at a time when AT&T controlled all the long-distance phone lines and forced customers to rent clunky home telephone units by the month.)
Despite these odds, the company stayed in business, growing slowly but steadily, even if it wasn’t providing any gains for its investors. Needing to raise more cash, it went public in 1976—and proceeded to sell under its offering price for fifteen months. But right as Reid Dennis was gathering folks around his dining room table, ROLM’s stock price started to bob up from under the water. “The market was beginning to arise,” McMurtry remembered. “The early birds were coming out.” In the case of Burt McMurtry, patience paid off. Ultimately, he and his partners reaped a fortyfold return on their ROLM investment, making him a fortune, and a reputation as one of the sagest VCs in town.24
Even though these promising signs meant that some Valley insiders weren’t convinced that politicking was necessary, the true believers dove into the task with single-minded focus. Another phase in Silicon Valley’s relationship with Washington had begun.
THE BATTLE OF 1978
It was Jimmy Carter who turned the capital gains tax from a boutique issue into a mainstream political debate—and it wasn’t because he sided with the venture capitalists. For all his campaign-trail talk of cutting red tape and promoting small business, Carter did not prove to be the reformer of the VCs’ dreams.
For one, his Administration wouldn’t budge on the hated “prudent man” rule. Stew Greenfield had become the NVCA’s point person on that particular issue, and he was gobsmacked by Department of Labor (DOL) diffidence about the rule’s unintended consequences. Tiring of Greenfield’s repeated visits, his government contacts were blunt. “This isn’t what Congress intended,” they acknowledged. “But our union friends are happy because the ventures you guys start are always non-union.” A furious Greenfield left convinced that they “wanted to stick it to the NVCA.” Dennis and Morgenthaler met with similar resistance. Leaving DOL after another fruitless visit, the two found a sardonic New Yorker cartoon taped to the back of an Assistant Secretary’s door, featuring two men cackling, “Venture capital! Remember venture capital?”25
Then, in early 1978, the president unveiled an unabashedly populist tax reform plan that went straight after the fat cats. “The privileged few are being subsidized by the rest of the taxpaying public,” declared Carter, “when they routinely deduct the cost of country club dues, hunting lodges, elegant meals, theater and sports tickets, and night club shows.” Nestled within the red-meat proclamations was a proposal for capital gains: not to cut the rate, but to eliminate the differential altogether, taxing the earnings at the same rate as ordinary income.26
The tech community sent its lobbying efforts into overdrive. The Californians beefed up WEMA into a national group, rebranding it as the American Electronics Association, or AEA. Boston tech mobilized as well, with leading mini
makers helping found the Massachusetts High Technology Council and both Digital and Wang joining the Massachusetts Business Roundtable. Zschau expanded his task force to bring in more of the national contingent, and started working more closely with Morgenthaler, Dennis, and the venture capitalists.27
The energetic platoon bombarded the Hill with white papers. They testified at hearing after hearing that high taxes on tech were “killing the goose that lays those golden eggs.” Zschau in particular displayed uninhibited zeal in his pursuit of a tax cut, going so far as to compose and sing an original ditty titled “Those Old Risk Capital Blues” and pressing cassette tapes of the recording into the hands of every Congressman and Senator. Those that listened reported back that Zschau sang in “a plaintive moan that sounds somewhere between Leadbelly and Frank Sinatra with a head cold.”28
New and savvy Washington operators soon joined the cause. One of them was a House Ways and Means staffer named Mark Bloomfield, who would soon join a new lobbying group devoted to supply-side goals, the grandly titled American Council for Capital Formation. A long-distance runner who spent 1976 working on Ronald Reagan’s bid for the Republican presidential nomination, Bloomfield had tenacity and sympathy for underdog causes, and he joined Zschau in the hunt for sympathetic legislators who could write tax bills. Before the spring of 1978 was out, they’d found one: an up-and-coming young Republican legislator named Bill Steiger, who had a seat on the all-powerful House Ways and Means Committee. And as luck would have it, Steiger also happened to be friends with Pete McCloskey.
William Albert Steiger was a pink-cheeked, spit-and-polish Republican from Oshkosh, Wisconsin, a man who appeared so youthful when first elected in 1967 that he often was mistaken for a Capitol Hill page. His 4-H Club looks masked a serious mind and prodigious work ethic, and he soon secured a plum post on tax-writing Ways and Means. Still, for his first several terms, he remained an obscure member of the minority party. He represented a rural district of dairies and clapboard farmhouses, and he seemed most interested in education and agricultural issues.
Yet he was among a cluster of rural legislators—both Democratic and Republican—who cared deeply about keeping capital gains rates low. Property-owning farmers and dairymen were entrepreneurs, too, and a good portion of their income could come from property appreciation or company stock. Steiger’s own family owned a development company; he understood how a capital gains tax rate could affect the bottom line. With Bloomfield and McCloskey making introductions, Steiger soon was sold on the tech leaders’ pitch. He agreed to introduce legislation to return the capital gains tax to 1969 levels.29
The venture capitalists and the Valley could not have found a better spokesman. With heartland credentials and friends across the Hill, Steiger was earnest, methodical, and knew how to land a political punch. He also grasped that the tax issue was as much an issue of psychology as it was of economics. “Capital gains taxes are even more important as a determinant of investment decisions than they are as a producer of revenue,” he explained. “This point is fundamental, and it is one that, to my sorrow, the President’s advisers fail to recognize.”30
The bill thrust Steiger from obscurity to inside-the-Beltway fame, and it also raised the political visibility of the tech executives who rallied to Washington in increasing numbers. Since his first, stumbling visits to the Hill three years before, David Morgenthaler had transformed from a political novice into an eloquent evangelist for the entrepreneurial class. “Before 1969, our society’s clear message to the entrepreneur was that it valued highly the creation of new companies with their new jobs and new technologies,” he testified at one hearing that year. The tax hike had changed all that. “The high-grade, successful people who make the best entrepreneurs are not slow to understand such a message.” While there was scant evidence that the general public actually cared about capital gains tax cuts—polling in fact found that Carter’s tax plan had good support among voters—official Washington became consumed by them.31
Importantly, Democrats, who’d long considered these tax breaks as something that unfairly benefitted the rich, began to buy into the narrative. One Washington Post op-ed in support of the bill did a clever retake on New Deal rhetoric by calling the American investor “today’s ‘forgotten man.’” Underscoring the mood was the passage of the property-tax-cutting Proposition 13 in California, which ended the Golden State’s expansive postwar era of public spending and infrastructural growth.32
Worried legislators looked at the brewing tax revolt and didn’t want to be on the wrong side of history. “It’s the old Horatio Alger vision,” said one analyst. “People want to keep taxes on investments low in case they strike it rich themselves someday.” “It’s obvious,” observed the Post’s editorial board that June, “that there has been a profound change in basic opinions about the tax structure—particularly among Democrats.”33
The Carter Administration struck back with force. Treasury Secretary Michael Blumenthal scoffed that the bill should be called the “Millionaire’s Relief Act.” But other Democrats were rallying to the tax cut cause. Using legislative language helpfully supplied by Zschau’s task force, Senator Clifford Hansen, conservative Democrat of Wyoming, pulled together sixty co-sponsors to pass a companion bill to Steiger’s House measure. As the summer session neared its end, it was clear that the tax-cut advocates had a veto-proof majority. The White House had to back down. In the autumn of 1978, Carter signed a sweeping tax reform law that looked very different from the populist package he’d introduced only months earlier. And there within it was the work of Bill Steiger: a capital gains tax cut to 28 percent. The venture capitalists and the tech industry had won, and their emissaries had become seasoned political operators in the process.34
Official Washington learned a potent political lesson in 1978. High-tech business was now a virtuous, even populist, political actor. They would score no points by appearing to stand in the way of its growth. Then, the following year, another tech-industry ally, Texas Democrat Lloyd Bentsen—“a gem,” declared Stew Greenfield—wrangled the DOL to loosen its interpretation of the “prudent man” rule. The firehose cranked open. Between 1978 and 1980, a staggering $1.5 billion in additional venture investment flowed into the tech world.35
The tech industry looked back on 1978 with the utter conviction that the tax cut was the catalyst for the high-tech boom. The same players continued to lobby an even lower capital gains rate throughout the 1980s. But was the capital gains tax rate the decisive factor? Tax cuts certainly made a difference, but other factors undoubtedly fueled the fire. The economy began to sweeten. The Federal Reserve under Paul Volcker gave the economy a high-interest-rate shock treatment that began to put the brakes on inflation. And the personal computer finally reached the technological and price point that made a large consumer market possible.
Subsequent analyses have indicated that the liberalization of the “prudent man” rule actually had a greater impact on enlarging the venture capital investment pool, pointing out that investments subject to capital gains make up only a minority fraction of overall venture investment. The biggest boon that the 1978 tax cut provided may have been a psychic one, giving both VCs and entrepreneurs more confidence to enter the start-up game once more.36
* * *
—
Bill Steiger never saw the extraordinary transformation of the tech industry that was about to come. After Jimmy Carter signed the tax bill into law, the AEA threw a huge party in Palo Alto to toast Steiger and Hansen, the legislators who had carried their cause to victory. Over 400 Valley executives crammed the ballroom at Rickey’s Hyatt House on El Camino; Ed Zschau was the emcee.37
Tragically, the California celebration turned out to be Steiger’s last. Back in Washington on the following Monday, the congressman was struck dead by a heart attack. He was thirty-nine, had been a diabetic since adolescence, and was in more fragile health than his workhorse habits let on. Congress grie
ved en masse, lining up to pay bipartisan tribute on the House floor. “I think the sky was the limit for Bill Steiger,” said a sorrowful George H. W. Bush, who had been one of the Wisconsonite’s closest friends. The venture capitalists showed their gratitude in other ways, establishing a college fund to support Steiger’s young son.38
The GOP had lost a rising star, but Steiger’s wife, Janet, carried on the family legacy with a two-decades-long career as a political appointee in both Republican and Democratic administrations. She became the first woman to chair the Federal Trade Commission. There, in 1990, she instigated the first antitrust investigation in the burgeoning software industry. Her target: Microsoft.
ACT THREE
GO PUBLIC
This is the West, sir. When the legend becomes fact, print the legend.
THE MAN WHO SHOT LIBERTY VALANCE (1962)1
Arrivals
TUCSON, 1979
Trish Millines’s mother cleaned houses for a living, day in and day out, in a New Jersey beach town whose part-time residents were white and wealthy and whose townies, like her, were mostly black and working class. Born in 1957, Millines was her single mother’s adopted only child, tall, athletic, and impatient. She was an honors student in nearly everything, but especially in math. It had taken teachers a while to discover her talent, as a gangly black girl wasn’t expected to have those sorts of skills. By the time the grown-ups around her figured this out, Millines was far behind the rest of the honors students and had to spend long hours after school and in the summer playing catch-up. Exhausted by eighth grade, she declared to her mother that she was not going to college. A furious Mrs. Millines responded by bringing her daughter to work, showing the scrubbing of floors and cleaning of toilets that awaited her if she didn’t get a college degree. Lesson learned.
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