RW: As a young New York investment banker, Arthur Rock convinced the wealthy industrialist, Sherman Fairchild, to talk to eight dissatisfied scientists at Shockley Labs. Sherman liked what he saw and Fairchild Semiconductor was born. Later, Rock moved to San Francisco and became its first venture capitalist. When Bob Noyce and Gordon Moore grew weary of the East Coast Fairchild management, Rock raised the money to start Intel in an afternoon. Rock was the moneyman behind Apple Computer, Scientific Data Systems and many other start-ups. In this 2002 interview, Rock describes his investment criteria and philosophy. So Mr. Rock, tell me about your early days? What was your family like?
AR: Well, I was born and raised in Rochester, New York. My father was an immigrant from Russia and my mother was first generation. My father operated a candy store in Rochester, and I would say that we were lower middle-class, so to speak; barely got along. And in 1944 I was drafted in the army and never got to serve overseas because I, the war was over by the time I was finished basic training and I was discharged and I went to Syracuse University on the GI Bill. Graduated from Syracuse in 1948 and spent a year in New York working as an accountant. And then went on to the Harvard Business School where I got an MBA in 1951.
RW: Do you have brothers and sisters?
AR: I had a brother, twelve years younger than I am. He's, he lives in Atlanta now.
RW: So, how did you get involved with Sherman Fairchild?
AR: Well, I was working at Hayden Stone at the time, which is a investment bank brokerage firm that has since merged with Shearson and then with American Express, and where it is now I don't know. But I got involved with Sherman because of Fairchild Semiconductor. The, Shockley was able to recruit almost anyone he wanted because of his Nobel Prize and he was considered quite an intellect and he can, he was able to get a lot of these young scientists to go to work for him at Shockley Laboratory Division of Beckman Instruments. And after they were there a couple of years, they became fairly disappointed with Shockley and, and Eugene Kleiner was one of the seven who had banded together and thought that they would like to quit Shockley and maybe get jobs together because there was no such thing in those days as forming a company and, what with the amount of capital that they needed to enter the semiconductor business. So Eugene Kleiner's father had a brokerage account with Hayden Stone and he contacted his father's registered representative where, those days was called a customer's man, and sent him a letter and this fellow showed the letter to me and I thought it was fairly interesting and came out to California with one of the partners of the firm. And we thought maybe we could form a company. And so, and to get financing for the company through some, through one of the larger companies. And so we agreed to do that, the seven of us, and then Bob Noyce decided he would join, and then became eight and then, of course, Shockley labeled us, labeled them the "Treacherous Eight". So we went through all the likely suspects and we had gone through thirty-five of them. And these were companies, now this was 1957, and there were a number of companies who were trying to get into more technology and, they had expressed interest to us previously that they would like to get into more technology, would we bring them anything in technology we saw. But when we told them that the deal was that they would set up, lend us money and set up a separate company and back it, they said no, they couldn't do that because they didn't, they thought it would upset their organizations. So at just about that time we were willing, we were about ready to give up. When through a third person, we met Sherman Fairchild and Sherman Fairchild was the largest owner of IBM stock because his father was partners with Tom Watson, Sr. in setting up IBM to send, called by International Data Processing or something, International Data Machines or something like that. And Tom Watson, Sr. had several children and Sherman Fairchild's father only had the one child. So Sherman Fairchild ended up with being the biggest owner of IBM stock. So he had plenty of money and he was an inventor and he had invented the aerial camera and, and the airplane to carry the camera. And so they, he set up two separate companies, Fairchild Airplane and Fairchild Camera and Instrument Corporation, and he decided that he would have Fairchild Camera and Instrument put up the million and a half dollars that we felt we needed in return for which they got an option to buy all of our stock. And the stock was divided ten percent for each of the eight and twenty percent for Hayden Stone. So that's how I met Sherman Fairchild.
RW: So what was he like personally?
AR: He was a an extremely nice man. I think eccentric is going too far but he was a little different. But extremely nice man and inventive and he liked young people and, I had taken through Hayden Stone's office one day and took him through the back, the back office, which of course had IBM cards, and he, he said to me, "You know, you hear tick tick tick tick tick tick tick tick. It's those machines going around and around." He said, "You know what I hear? I hear tick tick tick tick me, tick tick tick tick me." He was a, he was an extremely nice man. Very, very generous and kind. And, and of course, he passed on a couple years after the company was set up.
RW: So Semiconductor became very successful. Fairchild Semiconductor was successful.
AR: Very successful. And by 1968 they were making, I think in 1968 they made a hundred and ten percent of Fairchild Camera and Instrument's profits.
RW: How could it be a hundred and ten percent?
AR: Because the other part lost.
AR: Now I had some experience with Semiconductors because I was instrumental in helping finance General Transistor in 1955. So I, I knew something in a business sense about semiconductors and I appreciated their possibilities.
RW: So as Fairchild Semiconductor grew, what happened with the, the problem with the power back in New York and the money, the profits out here?
AR: Well, Fairchild Camera and Instrument was a company that was located in Syosset, New York. It's in Long Island. And it had, other than, when Sherman died the attitude changed a bit. They had a very, what I call an Eastern mentality in that they didn't want anybody to have any options in stock and the eight entrepreneurs who started Fairchild Semiconductor decided individually and together that they would gradually peel off and, and form their own enterprises because they couldn't get any more equity in, and a lot of the people there felt that they should be giving equity to some of the people who had, hadn't helped start the company but were instrumental in its, in its success. And Fairchild Camera and Instrument were, was unwilling to do that. So gradually they peeled off and finally by 1968 there were only Noyce and Moore left.
RW: And then, then they decided to leave.
AR: Then they decided to leave.
RW: And you were instrumental in that as well.
RW: So what did you do?
AR: What did I do? Well, I got a call from Noyce one day in 1968 saying, well, I'd been talking to him off and on, anyway. And finally in talking to him about the possibilities of doing something, and finally in 1968 he called me and said, "Gee, I think maybe Gordon and I do want to leave Fairchild Semiconductor and, and, and go into business for ourselves." And so we talked about it for a while and, I asked him how much money they needed and he said two and a half million dollars. And said, well, how much money are you guys willing to put up? He thought about it for a while and said, "Well, we'll each put up a quarter of a million dollars," which represented a fairly good portion of their net worth at the time. And so I was able to raise the two and a half million dollars pretty quickly for them.
RW: Now did they have a business plan, a written plan?
AR: I wrote the business plan. And it was a page and a half, and I had raised all the money before I even sent the plan out. People knew, knew me and knew Noyce and Moore and they were anxious to, to invest.
RW: Well, what was Bob Noyce like?
AR: That's a very difficult question. Because it depends on from what, where you're looking at him. He's a very, he's probably the most complex man I have ever met in his interests. He's an inventor. He's a, an athlete. He likes, likes learning all kinds of new things. Doesn't like to fire people, or he didn't. He liked to help people make their own decisions. He was interest, he, he, he was interested in music. He had a madrigal group. He's just a, as I said, extremely complex in, in his tastes.
RW: And of course, Gordon Moore.
AR: Well, Gordon was completely straightforward. There's not much that you don't see that isn't there. I mean, there isn't much there that you don't see. He knows where he wants to go and, and, and leads people there. I, he often makes the statement that he's an accidental entrepreneur and I don't think that's quite right. Gordon never stood out in the beginning when we were putting Fairchild Semiconductor together. And I don't actually remember his being very active. He was more a passive type. But as time went on, Gordon kept on growing and growing and just grew into various positions until he became now the Senior Statesman of the semiconductor industry. And I don't think any of this was accidental. I think it was, it would have happened regardless of, of Intel.
RW: That's great. So you, were you on the Board at Intel?
AR: I was on the Board from the beginning, yes. I was one of the founders in, in that, the three of us all had the, had the founder's stock. I mean I wasn't a founder in the sense that I contributed anything scientifically but in the sense that I signed the corporation papers and, and owned founder's stock.
RW: Well, that was a rather good investment.
AR: It was extremely good investment. Made my life a lot easier.
RW: Well, today Intel is the world's computer company.
AR: Supplies chips for over eighty percent of the computers that are built, yeah.
AR: Worldwide. Well, most of our sales now are overseas. I think sixty percent of our sales are overseas.
RW: Yeah. Incredible. Well, speaking of computers, are you, you were involved with Scientific Data Systems...
RW: ...were you not?
AR: I was indeed.
RW: Well, tell me about that story.
AR: Well, this was just about the time we were setting up Davis & Rock when I had moved out to California in 1961. And through a mutual friend I got a business plan that, it, sent to me in the mail after a phone conversation. And, it was to form Scientific Data Systems. And, I spent some time with Max Palevsky and, and just determined that this is something we wanted to back and Davis & Rock did, did back it. And we invested three hundred thousand dollars, became the lead investor and I became Chairman of the Board of Scientific Data Systems, as I was at Intel for a while.
RW: Well, which, which was a very successful scientific computer...
RW: ...company. But then Xerox bought it.
AR: Xerox came along and, you know, as, as they say in The Godfather, or somebody said, they made us an offer we absolutely could not refuse. I mean, it was just so much of a premium that they offered us that we all felt that if we didn't accept the offer, we'd be rightfully sued by our, by our shareholders.
RW: But it turned out to be a blunder on their part, was it not?
AR: It turned out to be a blunder and the reason it turned out to be a blunder was as follows. IBM decided they were going to enter the copying business in 1968. And Xerox decided, "Well, if they're going to enter the copying business, we're going to enter the computer business." And the only way they could enter the computer business, this is the things we found out much later. We didn't know all of this, because of course when they bought it they said they were going to leave us alone and, you know, they wanted to develop more entry into the scientific community. But what we learned later was that they wanted to counteract IBM's going into the copying business. So after they bought SDS, they changed the name to XDS and told us, "Well, we want you guys to enter the commercial computing business." And they sent in their own, some of their own people, and then they started to get SDS to, to change their business methods to comply with what Xerox was doing, and they finally blew it. I mean, SDS, our people knew nothing about competing in the business war, for business computers. We had great business with scientific computers. I think we were the first in the timeshare business. That business was going along great. So they blew it.
RW: Well, they managed to do that also with the personal computers.
AR: Yes they did.
RW: They had the first personal computers.
AR: Yes they did.
RW: What happened with that?
AR: I think they thought it would never work. I think they, Peter McCullough was, turns out was not a good CEO. He made a lot of wrong decisions. And that company has had a succession of poor Chief Executives and Xerox never really amounted to very much after about 1970.
RW: Well, on the computer front you were also involved with Apple Computer.
AR: I was involved with Apple Computer.
RW: Tell us about that.
AR: Well, Mike Markkula was a Vice President of Marketing at, at Intel. And he had, took very early retirement. He had made a lot of money in options and sold, I guess he's, I don't know whether he sold it but I assume he sold his options. And somehow or other he had hooked up with Steve Jobs and Steve Wozniak and had lent them three hundred thousand dollars in return for which he either had an option or some arrangement to get a third of the stock so the three of them then became equal owners. And Mike asked me if I'd be interested in investing in Apple Computer. And I met with Jobs and Wozniak and, gee, I really didn't think I wanted to be involved with them who were very young. Steve Jobs had just returned from six months in India with a, with a guru or whatever you call them. And they, they, they didn't appear very well and they were bragging about the blue box they had invented to steal money from the telephone companies. And I didn't like that too much. But Markkula kept, kept after me and said, "Well, you got to come down to the Homebrew Computer Show in, in San Jose." It's at some auditorium, which is a huge auditorium. Finally I, I decided I would go down. And there were all these booths at this computer show as there are at all these kinds of shows, and there's nobody at any of these booths. They were all at the Apple booth. And I could not get close to the Apple booth. I mean, here I was just came down to see Apple and I, I couldn't even get there. So I decided there must be something to this. And so because of Mike and I, figured that Mike would keep these guys in line. And that's what happened. Kept them in line for a while anyway.
RW: Yeah, well then, then there was a succession of bad managers there, were there not?
AR: Well, yes. Can't remember who the first fellow we had. But, but the managers had the problem of putting up with Steve Jobs. He, he was a, what's the word, a very disturbing force. And then we finally hired John Scully. And John, I think, did a great job for eight of the ten years he was there. I think if I recall correctly he built the sales from something like eight hundred mil, six hundred million to six billion. And then he got involved in democratic politics. He was a friend of the Clinton's for a while. And he also got, his, his wife didn't like living in California and she insisted that they move back to Connecticut and he would commute to run Apple from Connecticut. And between those two things, it turned out that his last two years weren't, weren't so hot and we had to ask him to step aside, become Chairman and we then hired, the then, I've forgotten what he was, Executive Vice President, I assume, Michael... Michael... Michael,
RW: The German guy?
AR: Yeah. "The diesel." Michael...
RW: Begins with an "S".
AR: Yeah, I know that. It's not Splinter because that's, he's at, he's at Intel and I get them confused. Anyway, Spindler! Spindler, Spindler. And it's just at that time that I left the Board of Apple, actually a couple days after we hired Spindler. And of course the reason I left was Apple is one of the few computer companies that does not use the Intel chip. And they use what they call a Power PC chip, which was made by Motorola. And a couple years prior to my leaving they were, decided they were going to design a new chip. And, with Motorola, IBM and, and Apple. I didn't have too much to do with this because all Apple was going to do was, I mean I didn't pay much attention to it because all Apple was going to do was put in some design criteria in, into the chip whereas Motorola and IBM were going to manufacture. And then lo and behold IBM, Apple and Motorola took an ad in all the newspapers, double page ad, and said, announcing the chip that they were now able to manufacture it and that they were going to kill Intel. Of course I was on Apple and Intel board. Killing Intel, I, I just had to resign from the Apple Board. And that was just at the time we hired Spindler to run the company.
RW: What are your criteria for making an investment?
AR: Well, you got to realize that I have no scientific background so, you know, all the scientific mumbo jumbo doesn't mean a lot to me. And what I'm interested in is investing in people. And I look for people who, you know, everything you could think of. They're honest. They have fire in their belly. They're intellectually honest meaning that they see things as they are, not the way they want them to be and, and have priorities and know where they're going and know how they're going to get there. So I spent a lot of time with people just trying to figure out. Which, the first meeting with anybody is, you know, everybody is on their best behavior. It's only after you get to know them for a while that you figure out. And, and, are these entrepreneurs interested in building companies. You know, a lot of people are just interested in, in building a company so they can make money and get out. That doesn't interest me at all. Usually it's not, not a successful way anyway, but that just doesn't interest me. People come in with business plans and, I mean I know that no one is going to meet everything they say in a business plan but you got to have something to, to guide towards. But when they have their five-year plan and they come down to net profits, that, that's okay. But then when they tell you how much your earnings per share is going to be and what the dilution is going to be and then how much, at what price earnings ratio the stock is going to sell at and then they tell you, well, you know if you invest it today you would make twenty times or a hundred times or something on your money, at that point I don't want to talk to them anymore. They just, very nice to have met you. Goodbye. Good luck.
RW: Well, we certainly went through the Internet bubble, and the Telecom bubble.
AR: Yes we did.
RW: Did you get caught in any of that?
AR: No, not really. I haven't made, I, those prices were ridiculous and I, I didn't quite understand it. I mean I, sure, I went along in a couple of deals with, you know, friends of mine. But I never, never started a company in that business. But the problem was greed. You, you know, just recently I participated in a, in a forum panel that the Computer History Museum put together. It was called "Pioneers of Venture Capital" and they found the six oldest venture capitalists. And, you know, we had a good time discussing the old days as you always do, remember what you want to remember. But the one thing that occurred to me was that the six of us were all company builders. And people entering the business in the, in the late 1990's were, were promoters. They're always promoting their companies and promoting their deals. I had a friend who ran a small investment banking firm and he told me that he used to get calls from venture capitalists saying, "Well, what stocks are hot because we want to go out and find companies to build, that are in that business so we can get out while the stocks are hot." You know, that's, that's promotion. And it just leads to this greed. And the greed I think feeds upon itself and there's no greed like this greed at the top of a bull market. And, what, what I mean by that is that people look at, at their friends or their competitors and say gee, look, look what he's done, and I'm better than he is. Therefore, I should be worth more than he is and, you know, it's a self-fulfilling and then self-defeating prophecy.
RW: Well, you, you certainly didn't see that with Noyce and Moore.
AR: No. No. They were company, they were never interested in how much money they were going to make.
RW: They were kind of accidental millionaires.
AR: Exactly. I mean, sure they like money as well as, you know, as any of us like money but that wasn't their goal in life.
RW: Okay. Any, any final thoughts here on the semiconductor industry?
AR: No, I don't think so.
RW: All right. Well, thank you Mr. Rock.
AR: If it hadn't been for, for us though, I, I might say that I doubt whether there'd be any silicon in Silicon Valley because the eight of them, or the seven at the time, would have probably found jobs by themselves and none of them would have, or very few of them would have ended up in, in Palo Alto or, Redwood City.
RW But it was really Shockley that, that he'd lived in Palo Alto as a young man.
AR: That's right. He just came back to his roots.
RW: So he really started the, the ball rolling.
AR: Well, that's right. But if the seven of these guys had gone their own ways, the only other company that some of them would have ended up in as semiconductor people would have been Texas Instruments.
RW: Well, we know that Rock is made of silicon.
AR: Oh boy. Oh boy.
RW: Thank you Mr. Rock.