Corrections or additions?

These articles by Barbara Fox were prepared for the

April 25, 2001 edition of U.S. 1 Newspaper. All rights reserved.

At Princeton: Class X Space

If Edison is offering Class A space to its portfolio

companies, Ed Zschau provides Class F or even X space. A software

firm called Onclave is the first occupant in what used to be a

cafeteria

in the power plant on the university’s Forrestal Campus. On the day

a reporter went there, the ceiling had leaked, leaving a puddle on

the tiled floor. The "conference room" is what used to be

the cafeteria’s kitchen, and its centerpiece is the stainless steel

worktable. The rest of this run-down territory is furnished in vintage

Salvation Army. Only the laptops, the high speed data lines, and the

whiteboard look up-to-date.

Indeed, this 3,000-square-foot territory is supposed to be the

equivalent

of a garage, says Zschau, in a cell phone interview on his way to

the airport. He commutes to Princeton from Nantucket, where he lives

with his wife. "I don’t want people to like it here. I want them

to want to move out into better quarters. Once a company gets

financed,

they graduate, and go get real space."

Zschau is a gregarious, politically savvy leader who likes a good

challenge, whether in sports or in business. Growing up in Omaha,

Nebraska, Zschau was treated to piano and figure skating lessons by

his parents. His father, an electrical engineer turned chamber

executive,

and his mother, a secretary, managed to fund ice skating summers in

Rochester and Colorado Springs that led to his trophies in national

freestyle and dance championships.

His skating career ended when he enrolled as a freshman at Princeton

University in 1957, and he no longer pursues that sport. "After

you’ve been good at skating, the thrill of sailing through the air

is not replaceable," he says. He points to the nine marathons

he has run, the 13 soccer teams he coached when his children were

growing up, and now he does serious weight training and bicycle

riding.

At Princeton he switched from physics to the philosophy of science,

then earned a Stanford MBA and a PhD in business administration, and

taught at both Harvard and Stanford, leaving academe in 1968 to found

a computer products company in what would soon be called Silicon

Valley.

Zschau helped redraft the tax code to reduce the 50 percent

capital-gains

tax on investment earnings to a 28 percent tax, paving the way for

billions of venture capital investment dollars for high-tech firms,

and paving the way for him to go to Washington.

In the early 1980s he spent four years representing the Silicon Valley

in the House of Representatives, where he worked on export laws.

"At

the time they were controlling everything, even stuff that didn’t

really matter, and weren’t doing a good job. In 1994 I helped to focus

on what really mattered, and freed up what wasn’t of military

significance."

After narrowly losing a Senate bid in 1986 to incumbent Alan Cranston,

he went into venture capital with the Silicon Valley office of

Brentwood

Associates, and then took over as CEO of a Brentwood portfolio

company, Censtor Corporation, that did advanced magnetic recording

components.

In 1993 he joined IBM, at the time when Lou Gerstner came to transform

the company. Zschau slashed his division, storage products, in half

and redid the product line, opening an original equipment manufacturer

(OEM) disk drive business. "I learned a lot from that

experience,"

Zschau says, "but it is true I find starting companies more

exciting

than running them, and building companies rather than re-sizing

them."

After just three years at IBM, he went back to teaching, this time

at Harvard.

Zschau genuinely likes working with young people. "Looking back

at the 1986 Senatorial campaign that I lost by a razor-thin margin,

I consider it as dodging a bullet. I have had such wonderful

opportunities

since then to do things that have been fun, interesting, and could

make a difference. What I am doing at Princeton with young people,

helping them start companies, this is where I belong." Each

semester

70 students work with him on case studies, Harvard Business School

style. The students, seniors in the engineering school or in the

master’s

of engineering program, tend to be younger than those at Harvard,

and not jaded by B-school doublespeak.

"These students are idealistic, enthusiastic, polite, talented,

and are looking forward to what they will do with their lives,"

he says. Articulate, thoughtful, analytical, and verbal are also

adjectives

he uses. Each must do either a business plan for a new company or

an in-depth analysis of a start-up company. Of the 365 Princeton

students

he has taught in seven semesters here, perhaps 25 or 30 have gotten

involved in start-ups.

Zschau invests in very early stage companies. "I don’t provide

a lot of money," he says. "I work very closely with the people

in order to develop a business plan and assemble the team." He does

this for more than one reason: "I want to leave footprints —

to help people create enterprises of value. And it is fun.

I wouldn’t do it if it were agony. It is particularly fun to work

with young people who have not had an opportunity to do this

before."

Zschau is involved in nine startups, most of them in California. He

was an initial investor for TrueSan Storage Area Network, started

by student who dropped out of Stanford at age 19. Last year the firm

raised $27 million.

Zschau’s student from Harvard Business School started

www.military.com,

which has grown to be the most popular website for military personnel

to exchange information.

He also invested in the company where one of his former Princeton

students is working (Live365.com). As the largest Internet radio

site, it lets would-be DJs create a show online and be listened to

worldwide.

Operating in stealth mode now is NanoOpto, a company that has a

licensing agreement with the university. It designs

"subwavelength"

optical components with features smaller than the wavelength of light,

and it manufacturers these devices by using miniaturization techniques

known as nanotechnology. It is based on Cottontail Lane in Somerset

and among its investors is Morgenthaler Ventures (www.nanoopto.com).

Because many of Zschau’s early investments are risky, he does not

get other people involved but provides all the initial funds himself.

"That way, I can pursue wild ideas. I am not investing anybody

else’s money. I can work with people I happen to like who may not

be as `investible’ (ready to invest in) as some would like to see.

Some of the people I work with have never done this before but have

the decision and the desire."

Not all his investments have played out well over the long haul; at

least one suffered from the dotcom slowdown. One of the Harvard

students

that he worked with started www.chemdex.com, selling specialty

chemicals over the Internet. "A year ago," says Zschau,

"it

was valued at $6.4 billion. Today, it is announcing it is valued at

$20 million and will be delisted from Nasdaq. I teach the case now;

now we know a lot more about how the world really works."

"When I started," Zschau says, "all these ideas were fresh

and looked interesting, and now we look at them and say that wasn’t

very smart. Idealab, for instance, tended to start companies with

really dumb ideas and throw a lot of them at the wall, hoping that

some of the stuck."

Over the last five years, in the midst of the dotcom balloon-up, his

entrepreneurism students at Harvard and Princeton were not always

respectful of Zschau’s views, he reports. "A year ago many of

my students were convinced that products and profits represented the

old economy, and that the new economy was about spending a lot of

money and generating stickiness and eyeballs on websites," he

says. "Now the old rules are coming back into play. Frankly, it

is a lot easier to work with students now.

"People in the venture capital business and on Wall Street had

become convinced that profit and creating real value wasn’t what it

was about," says Zschau. "I always knew it." But he holds

out the hope that a "garage-based business" can succeed. After

all, Hewlett Packard began in a garage.

— Barbara Fox


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