AT 38, DAN WARMENHOVEN NEVER dreamed he'd be CEO of a $180 million company. He also didn't think that by taking the job he'd wind up unemployed. But that's what happened after Warmenhoven joined Network Equipment Technologies (NET) as chief operating officer and president in 1989. Taking on this job was a big step up for Warmenhoven, whose résumé included general manager posts at Hewlett-Packard and IBM. And NET looked like a terrific place to land. Revenue, $47.4 million in 1987, had nearly quadrupled by 1989. The company was a darling of Wall Street, and Warmenhoven got set for a great run.

But behind NET'S impressive numbers, the company was in deep trouble. Sales figures were inflated by about $6 million over two quarters. The SEC initiated an investigation. Shareholders filed a fraud lawsuit. And then-CEO Bruce Smith and CFO Barry Roach resigned. That left a woefully underprepared Warmenhoven, suddenly CEO, to effect a turnaround.

He failed. He reversed the slide in revenues (boosting NET's income from $135 million in 1991 to $219 million in 1993). But the company did not return to profitability. Warmenhoven and NET's board members disagreed on future strategies, and he resigned on January 1, 1994, rather than face being fired.

In most parts of the country, Warmenhoven's career would have been over, though he was only 43. But not in Silicon Valley. Today, Warmenhoven is CEO of Network Appliance, a promising network file-server maker in Santa Clara, California. And if he fails at this job, chances are good he'll land another.

That's because in the high tech industry, failure is a prized, not a scorned, offense. Along Philadelphia's Main Line, on Wall Street, or in the Motor City, the executive who flops gets driven out and often becomes unemployable. But in Silicon Valley, failure is an everyday event (Read "Try, Try Again,"  in Sour Dreams). There's little (if any) stigma attached to a washout. Failing is even considered highly desirable management experience.

This forgiving attitude is what makes the technology sector so dynamic. A failure is rarely a dead end; it's just another opportunity. The unemployment rate in Silicon Valley—consistently lower than the national average—reflects this entrepreneurial spirit. Currently just 3% of Silicon Valley residents are jobless, versus 5.3% nationally.

Unlike their counterparts in other industries, fallen technology entrepreneurs do not get branded as losers. Instead, they're likely to be refinanced by the very backers who've lost money on them before. "Investors here always look at the cup as half full, not half empty," says Ann Winblad, a software venture capitalist in Emeryville, California. "They are willing to take chances on entrepreneurs who've made mistakes."

Adds fellow venture financier Mike Child of TA Associates, "A lot of investors don't like to back guys out of big companies who haven't failed. They haven't learned the issues of meeting payroll, raising money, budgeting for R&D. They just don't know how to run a startup. People who have failed are hungrier and have a keener understanding of the product-market timing interface."

THIS ATTITUDE HAS PRODUCED dozens of entrepreneurial failures who have come back from the brink and won. Consider the career of Manny Fernandez, now the CEO of the Gartner Group, a well-regarded high tech consulting firm in Stamford, Connecticut. A veteran of early semiconductor companies Harris and Fairchild, he successfully ran chipmaker Zilog, too. Then he started Gavilan Computer in the early 1980s and promptly lost more than $30 million in venture capital.

Gavilan had attracted $85 million in orders by creating the industry's first prototype of a lightweight laptop. But Fernandez made a critical mistake by choosing a nonstandard, 3-inch disk drive for the machine. His supplier, Hitachi, couldn't make the drive in mass quantities fast enough, delaying the release of the laptop. Meanwhile, Osborne Computer, another laptop manufacturer, went into Chapter 11 in September 1983, which destroyed Wall Street's interest in portable computer companies. Unable to raise cash through an initial public offering, Gavilan went bankrupt in 1984.

But Fernandez's career didn't suffer. He joined Dataquest, a San Jose, California-based technology market research firm, the day after leaving Gavilan. Within nine months he became Dataquest's CEO. Next he went to Gartner in 1991 and took over the president and CEO positions. Four years later he orchestrated Gartner's buyout of Dataquest for $75 million. Says Jeff Christian, president of the executive recruiting firm Christian and Timbers, "Manny Fernandez is a good example. He's a hero again. In Silicon Valley a failed CEO is quickly forgiven as long as he makes money for his investors the next time. If he demonstrates success, memories fade and investors look at what he is delivering today."

Just as technology executives survive setbacks, so too do entire Silicon Valley communities. Witness Apple Computer's dramatic announcement in March that it would terminate 2,700 full-time employees and 1,400 contractors and temporaries. Many worked in Apple's Cupertino, California, headquarters.

But the layoff didn't undo Cupertino's economy. As the home of such companies as Tandem Computers (4,000 employees) and about 25 smaller tech firms, the town has a well-cushioned economic base. And as for the fired Apple employees? No sweat. "They have access to information about the [job] market, and they have cutting-edge skills," says Maria Hernandez, a Bay Area management psychologist and consultant. "There is a willingness to be highly mobile here."

COMPARE THAT TO THE ANXIETY that occurred in Biddeford, Maine, when a threatened plant closing sent the mill town into turmoil. At issue: the proposed shuttering of Biddeford Textile, a maker of the fabric shells that enclose electric blankets. Sunbeam, a corporation bent on slashing costs under the iron fist of chairman Albert Dunlap, owns the plant. Last November he announced Sunbeam would close it or sell it off.

The mill employs just 350 of the town's 21,000 residents, and contributes about $150,000 weekly to the local economy. Losing the mill wouldn't have bankrupt the town, but the workers, their union, and town officials scrambled to organize an employee buyout that was completed in late April. Sunbeam's plan to shut the mill sent a chill through the psyche of Biddeford, says Portland Press Herald reporter Jack Beaudoin, who is covering the saga. "Biddeford used to be a mill town, but one by one they have all closed," says Beaudoin. "Now it's a mill town with no mills. It's a psychological issue."

Adds Silicon Valley consultant Hernandez, "Chances are the people at the mill feel they are victims. That kind of thinking is more evident outside of Silicon Valley. Here the thinking is completely different. Employees are more willing to experiment, to look for new things. They don't blame their employer for the changes in the market."

Those who lost their job at Apple have one more thing going for them: the simple law of supply and demand. The Internet explosion has sparked 265 venture-capital-backed Silicon Valley companies in the past two years, all of which are chasing a limited supply of top engineering and management talent. Fired? Failed? It doesn't seem to matter.

"There has never been a time in the industry where there are more opportunities but such a lack of human capital," laments high tech headhunter David Beirne. "The talent is not there to populate all the companies that have sprung up. So a lot of guys who have made mistakes are getting in on the opportunities. A lot of sins are being forgiven.
 

Source: Geoff Baum, Forbes, June 2, 1997