John Chambers on the Silicon Valley exodus: ‘We’re in real trouble’

"The complacency is scary."

​John Chambers

John Chambers is worried about the future of Silicon Valley.

Photo: JC2 Ventures

John Chambers is considered somewhat of a legend in Silicon Valley. And he's very nervous about its future.

Chambers led Cisco for two decades, guiding the tech giant through major waves of disruption and innovation. After stepping down in 2015, he embarked on a new career as a venture capitalist, launching JC2 Ventures in 2018.

His views still resonate in tech and Silicon Valley, where he's often viewed as an elder statesman and mentor. And he has a lot to say nowadays.

In a conversation with Protocol, Chambers shared his deep concern about the future of California, and particularly Silicon Valley. He spoke of the alarming wave of departures from the region and the state, led by Hewlett Packard Enterprise and Oracle. He also shared his frustration with California's leadership and explained his decision to endorse the potential candidacy of the former mayor of San Diego, Kevin Faulconer, as the campaign to recall Gov. Gavin Newsom gains momentum.

This interview has been edited for brevity and clarity.

You endorsed former San Diego Mayor Kevin Faulconer's potential gubernatorial run. But are you supporting the campaign to recall Gov. Gavin Newsom?

Two separate items. Am I supporting Kevin? Absolutely. Am I actively involved in the recall? No. If there is going to be an election, I do think it is time for a change. I think we are in trouble in California.

At the present time, California is not a good state to do business in. It is getting worse. It used to be that every startup that I was involved in, if they weren't in Silicon Valley, they were talking about: When would they come? No one's asking that question anymore. When you see Hewlett Packard [Enterprise] leave — they were the original garage startup and the one that I modeled after culturally — when you see Charles Schwab leave, when you see Elon Musk leave himself, you realize our state has a problem and we are in denial.

The issues aren't anything to do with any political party. The issues are our regulations are non-competitive; our cost of living is non-competitive; our tax structure is the worst in the nation.

They had the golden goose, and nobody seems to care that suddenly the geese are flying away.

The implications for our state, long term, are terrible on job creation. Remember each core job in tech supports five additional jobs, everybody from the people who build houses to the dentists to the people who do the landscaping, the Uber drivers and so on.

I believe it's time for a change. It would be easy to just ignore this and just automatically go with startups moving throughout the nation. But I owe an obligation to Silicon Valley for us to know what I think the outcome will be at the current trends. Because I've seen the movie so many times before.

This is self-inflicted, entirely. It's a regulatory environment that takes business for granted: that when they pass regulations, they don't even do a study on the impact on jobs, especially startups and small companies. You can hit a big company with a billion-dollar fine and their stock probably won't even move. You hit a small company with regulations on privacy or other issues and that means they may not be able to be viable. Or they'll have to go to another state for the majority of their employees.

You have to realize this is global competition for new companies and existing companies. And we're not even competing. You're going to disrupt or you get disrupted. At the present time, we're getting disrupted at tremendous speed. And the complacency is scary.

It's too late once the jobs are gone, and then all of a sudden our kids can't get jobs in the state, regardless of where they are. It's too late when you suddenly say, my tax base got cut by 30% because the companies and employees left. If I were doing a startup today, I would go to Texas.

Is there a regulation that stands out for you as an example?

I think the effects of the privacy rules being passed. Do I believe that we've got to have privacy regulation? Absolutely. But you've got to understand the economic impact, especially for small companies. For every regulation passed, there should be an accompanying summary of what it means to jobs, especially jobs in startups.

The large companies will not add total headcount over the next decade anywhere in the U.S. There'll be some, like an Apple, that may go up dramatically, or an Amazon, but the banks, the manufacturing, the tech companies won't add [jobs] in total. So if you don't create an environment that is very friendly to small businesses getting bigger and startups getting bigger, you've got an issue coming at you.

Is it too late for California, in your view?

I think that the luster is clearly going off our star. I think we missed an opportunity to clearly lead in the next generation, which, by the way, we could have done.

Is it too late? No. But have we lost a huge amount of momentum? Yes. Is it very manageable and fixable? Yes, it is. But it requires a concerted effort starting with: We want this to be the state that does the best job creation. I believe we're in real trouble in California.

What are the implications, in your view, of the tech exodus from California? Some people would say that's actually a good thing because it creates new centers for tech.

Well, it's a good thing in that every state in the U.S. has to become a digital state and a startup state. And this is something that creates opportunities. I don't think there's any entitlement on where the future startup state will be. It's up for grabs. But right now, if you're handicapping them, you probably would handicap new players like Texas. Watch how quickly Florida has come up. You'd have to handicap it against New York and California.

What are your own initial thoughts about the Biden administration's approach to tech?

It's too early to tell. I think he has appointed people who are tech-savvy. [But] neither party ran on startups, on digitization as part of their platform. [Prime Minister Narendra] Modi did in India. [President Emmanuel] Macron clearly did in France. [Note: Chambers is an advisor to the Macron government, which named him global ambassador to French Tech. He is also the chairman of the U.S.-India Strategic Partnership Forum.]

This is our game. We invented this, and yet we're getting beat by others on it. Watch how far Texas has come in just five years. Five years. And who would have thought Montana or West Virginia would be a great place for a startup.

The U.S. needs a digital policy. France used to be the worst place in Europe to do business. They moved from a startup environment that was just terrible to the fastest-growing startup environment in all of Europe. We need to get back to a startup nation, a digital nation, and we need a national plan to go about it.

Going back to California: Are you considering moving, John?

If I were 25 years younger, the answer would be: It's my wife's decision, but I would. My brother-in-law and sister-in-law who had startups here in California, they moved to Florida several years ago.

Each of my startups that are located in California [is] considering: Should they stay here? Should they have the majority of their headcount remain in California? I don't know of a company that's not thinking about that.

What do you tell them?

Your decision. Here are the pluses and minuses.

Have you considered becoming active politically?

If I were going to be active politically I would have had to do it about 20 or 25 years ago. And I thought pretty seriously about it at that time. I had friends who encouraged that. But I'm not a political person. I like Democrats [and] Republicans. I have a great deal of admiration for Biden; I have a great deal of admiration with George Bush. And so I tend to be more focused on just getting things done. Will I, however, support, regardless of party, people whose values that [I] share? Answer: yes. I believe hugely in democracy and the faith in our electoral system.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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