Edited by Peng Lian
Editor's Note: Why was venture capital born in Silicon Valley and nowhere else? Perhaps you can think of a few scattered factors, such as Stanford University, NASA, Fairchild ...... In the opinion of Tom Nicolas, a professor at Harvard Business School, the birth of venture capital in Silicon Valley is attributed to three factors: the innovative universities represented by Stanford, the push of government military spending on high technology, and the special culture, culture and culture of the Silicon Valley. and the special culture, laws and natural climate. Nicholas also believes that venture capital is a state of mind, characterized by a desire for adventure, bold innovation, and the pursuit of unlikely riches through innovative investments, all of which have been integral to the history of Silicon Valley's origins as a place of venture capital, which is why he wrote this book, Venture Capital, a historical look at the venture capital industry. This article is excerpted from Chapter 6 of the book, "Prerequisites for Venture Capital in Silicon Valley".
The history of Silicon Valley is well documented. The seeds of its success were planted in the late 1800s in what is now commonly referred to as "Silicon Valley," a five-county area in San Francisco Bay. Its venture capital-related expansion owes much to the confluence of three main factors: the direct and indirect influence of universities, the push for high technology by government military spending, and a particular cultural, legal, and physical climate. The formation of strong innovation clusters creates a demand for venture capital to fund people, technologies, and products that have not yet succeeded.
The overlooked Frederick Trotman
It is important to go back in time and detail Frederick Trotman's contribution to the growth of the venture capital industry.
Frederick Terman graduated from Stanford University in 1922 and returned to his alma mater after spending three years earning a PhD in electrical engineering from MIT.
In 1941, Terman became dean of Stanford's School of Engineering, and then provost of Stanford 14 years later. In these roles, he developed strategies for achieving both academic and practical success by combining science and engineering, and linking academia with local companies. Terman is often cited as one of the major figures in the evolution of Silicon Valley.
Terman's actions at Stanford were not without self-interest. He encouraged entrepreneurs to visit the campus with the goal of improving Stanford's then-strapped financial situation. But crucially, he combined the need for fundraising with an effective university strategy, and in 1937, his proposal that the university should own any patents granted to its researchers was agreed by the university's board of trustees.
This was important because Terman was convinced that university-industry links could be achieved by providing and sharing space. That year, brothers Russell and Sigurd Varian were invited to use Stanford's physics labs, where they began joint work that would later become the basis for radar technology. Working together was their academic partner William Hansen, a close colleague of the immigrant-born quantum physicist Felix Bloch, who became Stanford's first Nobel laureate in 1952.
Stanford provided space and laboratory supplies and licensed revenue from patents, including the famous patent for the tachyon tube vacuum tube, which was used to generate high-power microwaves for airborne radar detection technology. Stanford incubated some of the pivotal innovations of the 20th century and earned royalties of about $2 million (about $18 million today).
In the early 1950s, as a continuation of the emphasis on bringing academia and the private sector closer together physically, Terman designated a portion of undeveloped land at the University as the Stanford Industrial Park, leasing it primarily to electronics and high-technology firms, and in 1953, the Varian brothers were among the first to locate there with the opening of Varian Partners. Hewlett-Packard, in which Trotman was one of the first investors, followed. By 1961, more than 25 companies had moved into the 650-acre campus, employing 11,000 people, and eventually even well-established East Coast companies, including General Electric, Eastman Kodak, Lockheed, and Xerox, opened branches there. (In Xerox's case, this was the Palo Alto Research Center, known as PARC.) To bring companies closer to Stanford's faculty and students, Terman launched the Honors Co-op Program in 1954, which allowed engineers from local electronics companies to take some graduate courses directly. By 1961, 32 companies were sending more than 400 employees to Stanford. Off-campus, Terman further expanded
Stanford's vision of enjoying space with industrial companies*** in nearby Menlo Park. The Stanford Research Institute, founded here in 1946, brought together a large number of faculty members who pursued "practical science" and "assisted West Coast business" in ways that "may not have been entirely compatible with the traditional role of the university.
In the post-Terman era, University leaders have continued to develop this strong and valuable tradition of Stanford's ties to industry. In 1964, for example, Stanford persuaded engineers at Shockley Semiconductor to open a new integrated circuit laboratory and help the university integrate new technologies into its technical programs.
A few years later, Stanford expanded the Stanford Industrial Affiliates Program, which allows companies to use academic labs, access students and faculty, attend research conferences, and conduct special recruiting activities for a small fee. For new inventions emerging from this joint affiliation program, the university established a licensing office in 1969 to help commercialize new products. Even the smallest technology companies are able to thrive in an environment where technical ideas are discussed and refined. Beginning in 1975, Stanford began hosting meetings of the Homebrew Computer Club at the University's Linear Accelerator Center. The club is a gathering place for fledgling inventors and entrepreneurs, with members including Steve Jobs and Stephen Wozniak, who want to show off their latest technological inventions and share their ideas.
Venture capitalists emphasized the importance of this growing regional dominance because "despite the achievements of MIT and Harvard, by the mid-1960s Boston had lost out to Silicon Valley's semiconductor specialists in the race to become a center for tech entrepreneurship".
Looking back at the causes and consequences of this geographic shift, Arthur Rock, a leading venture capitalist, theorized that "all the energetic scientists grew up around Stanford. In my opinion, although there are some exceptions, this is mainly due to Frederick Trotman. He was the dean of Stanford's School of Engineering, and he encouraged students, especially doctoral and postdoctoral students, to form companies and go on to teach at Stanford. At the time, this was a completely new concept at any other school - and it clearly wasn't happening at MIT, or Harvard, or Princeton, or any of the good engineering schools. people at MIT would be fired if they started companies."
Terman was a catalyst for the development of the electronics industry in the San Francisco Bay Area, yet it could also be argued that he was a product of its development. Significantly, before he came to MIT in the early 1920s to pursue his doctorate, Terman did a summer internship at Federal Telecommunications, a Palo Alto startup at the heart of wireless transmission technology.
Moreover, while Stanford undoubtedly played an important role in the evolution of Silicon Valley's regional dominance, the influence of other factors was equally important. California's flagship institution of higher education also established high-quality centers in high-tech fields. the University of California, Berkeley became a scientific heavyweight after physicist Ernest Lawrence was awarded the Nobel Prize in Physics in 1939. Lawrence Berkeley National Laboratory became a hub for cutting-edge developments in basic science.
Revolutionary Silicon Valley engineer and entrepreneur Gordon Moore attended San Jose State University before transferring to UC Berkeley, where he received an undergraduate degree in chemistry in 1950.
In the 1970s, more scientists and engineers graduated from San Jose State than Stanford or Berkeley, and the local community colleges within the California system provided important technical training programs. technical training programs.
The impact of these educational institutions meant that capital, expertise, and ideas were attracted to the region, which created a host of economic activity and a wealth of opportunities that potentially went hand-in-hand with risk. These forces are self-reinforcing once venture capital organizations start moving in.
Don't forget the demand created by military contracting
In the 1980s and 1990s, the likelihood of VC investment declined significantly as the geographic proximity between VC locations and startups rose, even though co-investment between companies in different locations provided an avenue for geographic diversification of portfolios. In general, it is easier to manage investments in geographic proximity.
While the positive impact of universities has helped Silicon Valley become a premier high-tech center, a large and unexpected shock to the demand for its specialized products has made further expansion and innovation possible. Thanks to the U.S. military's push during World War II and the Korean War, the region's electronics companies made a name for themselves across the U.S., reinforcing their early dominance. During World War I, Federated Telecommunications created the Poulsen Arc Long Wave Radio for the U.S. Navy, which quickly became the "Navy's favorite during World War I."
Federal Telecom's spin-off, Megaforce, built public **** broadcasting systems for U.S. Navy battleships, and noise-resistant microphones for airships. investments in military and industrial facilities. In what the San Francisco Chronicle called the "Second Gold Rush," California trailed only New York and Michigan in total spending.
California received a lot of money for a variety of reasons, including specialization in technologies related to wartime needs. Military procurement of microwave tubes was one of the Bay Area's technological specialties, with purchases soaring from a few million dollars in 1940 to $113 million in 1959. The dramatic increase in military procurement allowed California to increase its share of quality military contracts from 13 percent in 1951 to 26 percent in 1953, leapfrogging New York, which had previously ranked first, in total military contract spending.
Between 1955 and 1959, purchases of transistors by the armed forces increased from $1.8 million to $99 million, and the Department of Defense quickly became the largest consumer of these products. In fact, until 1967, the U.S. military consumed more than half of all integrated circuits produced by Bay Area companies.
Given that the military was an early adopter, it imposed strict technical standards on the contracting companies, and also financed a learning curve to bring production costs down to a reasonable range. Military demand was an important precondition for the expansion of the consumer market. For example, the unit price of an integrated circuit fell from $31.60 to $2.33 from 1963-1968.
Entrepreneurs responded to the military's increased demand for high-tech products by continuing the tradition of starting new companies. Financing is often done through informal mechanisms similar to those discussed in Chapter Three. Russian-born electrical engineer Alexander Poniatov was an employee of Delmoviktor, a manufacturer of submarine antennas in the booming wartime San Carlos.
In 1944, he took $25,000 from his boss, added $5,000 of his own savings, and a loan from the First National Bank, and started the Ampex Corporation to work on the design of antennas for military aircraft. Then Poniatov was unusually successful, and less than two years later he had to move the company to a larger site. The Varian brothers raised $120,000 in 1948 from friends, employees, and investors around the world for Varian Partners, which evolved into a springboard for entrepreneurs. The firm's employees started more than 20 high-tech companies in the second half of the 1960s.
Despite the security of military contracting, Bay Area companies struggled to increase productivity, and in 1942, engineers at Federated Telecommunications designed a new vacuum tube production technique that increased yields from 35 percent to more than 95 percent. This allowed the company to expand production and increase revenues from $47,000 per month to more than $600,000 per month.24 In 1941-1944, Hewlett-Packard reorganized its line of electronic measuring equipment and receivers, increasing production 26-fold from $37,000 to $1 million, and increasing employees 10-fold from 9 to 100.25 In 1941-1944, Hewlett-Packard reorganized its line of electronic measuring equipment and receivers, increasing production 26-fold from $37,000 to $1 million and increasing employees 10-fold from 9 to 100.26
Warrick, Inc.
Varian Partners increased sales of speed tubes 125-fold from 1949-1959, while increasing the size of the workforce only four-fold. This made Varian the largest microwave tube manufacturer in the United States, surpassing General Electric, Raytheon, and Radio Corporation of America.
The increase in federal funding was accompanied by an influx of human capital. from July 1940-July 1945, there was a net influx of 1,987,000 people across California. Employment in high-tech fields grew to more than 58,000 by 1960 as companies expanded to meet military production needs. In San Mateo and Santa Clara counties alone, employment in electronic component manufacturing grew from less than 1,000 to 10,000 people.
This makes San Jose the urban area with the highest density of highly skilled workers in the United States.30 As a group of the best innovators came to work in the Bay Area, they attracted an even greater influx of highly skilled immigrants. For example, Nobel laureate William Shockley grew up in Palo Alto, worked at Bell Telephone Laboratories in New York and New Jersey, and was part of the team that invented the transistor before returning to the Bay Area to care for his mother.In 1955 (the year he won the Nobel Prize in Physics), Shockley founded Shockley Semiconductor Laboratories in Mountain View, California, with the goal of commercializing new technologies. commercialization.
As military contracting began to shrink, the staying power of Bay Area entrepreneurial activity began to shine through: in the 1960s, U.S. Secretary of Defense Robert McNamara reduced military spending on high-tech equipment. For example, the total cost of microwave tubes purchased by the U.S. Department of Defense fell from $146 million in 1962 to $115 million in 1964.3 The cost-plus of the lucrative contracts was a major factor in the decline. Lucrative cost-plus contracts (contracts that paid for production as well as guaranteed fixed costs) had helped build the foundation of local manufacturing, but the share of such contracts in all contracts fell from 35% to 15% from 1960-1965.31 As a testament to the region's ability to innovate, incumbent firms quickly adapted to new realities by changing their product lines.
The Eitel McCullough Company, spun off from Heinz Kaufmann, a manufacturer of custom radio equipment, in 1934, developed a line of grid tubes designed to improve FM radios. The Litton Engineering Laboratory, founded in 1932 by Charles Litton (who had two Stanford engineering degrees: mechanical engineering in 1924 and electrical engineering in 1925), adapted its microwave tube division to produce microwave ovens. Varian Partners began producing scientific and medical instruments, so much so that the company's share of sales to the military dropped from 90% to 40% in just eight years.
This intra-company resourcing of the Bay Area represents a level of adaptability that is missing elsewhere. Boston's Route 128, home to important companies such as Digital Equipment Corporation, was unable to adapt in the same way. Existing firms are slow to shift product lines. Raytheon, for example, was one of the most military-dependent companies on the East Coast, and continued to sell more than 55 percent of its production to the military into the late 1960s.The wave of entrepreneurship after 1960 did not sweep across Route 128 as it did in the Bay Area.Between 1959 and 1976, more than 40 new semiconductor firms were established in northern California, compared to five new firms in Massachusetts. Massachusetts had only 5 new companies.
Coupled with the inertia of existing firms, Route 128's high-tech sector lost more than 30,000 jobs in the early 1970s.35 By the mid-1970s, Route 128's technological decline was so unusually severe that employment and output began to move westward. It is no coincidence that venture capital was attracted to the areas with the most high-tech opportunities.
The best climate and a democratic culture
If universities and military investment are tangible contributors to the surge in entrepreneurial opportunities, the influence of Silicon Valley culture is even more intangible. Culture is hard to define, but it manifests itself in many ways, attracting specific types of people who identify with, and also helping to establish, a different business ethos than that of the East Coast. According to Anna Lee Saxenian, "the culture of the region encourages risk and accepts failure" and "there are no boundaries of age, status, or social class that prevent people from making a fresh start.
Practical universities, along with rolling hills, sunny days, and a temperate climate, attract people interested in technology, many of whom are uninterested in cold winters and the more structured order of the East Coast. In testimony to Congress on how to foster "a climate of entrepreneurship and innovation in the United States," Intel's Robert Noyce emphasized Silicon Valley's geographic advantages. "What attracted us to this place?" He asked, "First and foremost is one of the most pleasant climates in the world. There's good weather and a terrain that, at least at the time, was unspoiled." Intel employees can pick pears in the orchard at their company in Mountain View.
New technology discoveries are publicized in news outlets such as San Francisco radio stations. Ralph Heinz, co-founder of Heinz Kaufmann, recalled that in the electronics industry, "we learned from each other". Budding entrepreneurs could write their own rules on a new cultural canvas, unencumbered by decades of East Coast tradition.
Cultural openness can be a powerful driver of creativity and innovation. In the Bay Area, it helps foster the technological advances that may come with immigration. Paradoxically, given the connection between the growth of Bay Area businesses and military technology highlighted above, immigrant inventors play a key role in the development of private sector industries precisely because of the limited number of defense-related employment opportunities available to them.
In his congressional testimony, Noyce claimed that 80 percent of Intel's new PhD hires and 50 percent of its masters hires in 1985 were foreign-born. Noyce even joked that these people tend to be "better prepared than our students here". He went on to list a number of high-tech R&D achievements by immigrants. "Let me just say that the first microprocessor was done by an Italian engineer named Federico Fagin, who went on to form Zilog, which became one of the major companies in the field," he said, "Intel's first erasable programmable read-only memory, and one of our most Intel's first erasable programmable read-only memory, and one of our most important products, was developed by Israelis working at Intel. A Japanese engineer designed the 8080 microprocessor. Aryeh Feingold, an Israeli, founded Daisy Systems, a major computer-aided design/computer-aided engineering company. Philip Hwang from South Korea founded Graphic, one of Silicon Valley's most successful terminal and microprocessor/microcomputer companies. Sijang Rai Tandon from India founded Tandon Computers."
The business culture here is characterized by democracy. As early as the late 1940s, the Varian brothers chose the name "Varian Partners" to emphasize that their organization would be an "association of equals" rather than a corporation of employers and employees.
Varian Partners has no detailed financial statements, and each engineer is a part owner. Employees vote for colleagues who sit on the management advisory board, which helps senior engineers design company policy. Similarly, HP maintains a nontraditional, decentralized organizational structure in the belief that it encourages teamwork, openness, and creativity. Senior managers, including the two founders, often worked with new engineers. Managers were encouraged to "move around" and be accessible to employees. They fostered informal, unplanned conversations with employees and encouraged them to pursue their own ideas.
As this approach spread, a new management model emerged. Tom Wolfe's acclaimed article on Silicon Valley for Esquire magazine in December 1983 stated, "The atmosphere in these new companies was so democratic that it shocked businessmen from the East."
Bay Area technology companies were among the first to offer non-monetary fringe benefits that were also the most ambitious at the time they were designed: in 1939, Aimac created an on-site medical department and a subsidized cafeteria for its workers. Litton Industries (founded in 1947) went a step further in 1949, purchasing a large tract of land around Lake Jackson in the Siraya Mountains for an employee resort. Profit-sharing and employee stock ownership plans became more common, in part to retain talent. When Electrodynamics, a major manufacturer of microwave tubes, acquired Litton in 1953, it offered stock options to every Litton management person as an incentive to stay with the merged entity and participate in its operations.43 And at the time, option-based compensation was not common.
Because it built the ability to ensure employee loyalty, this management practice had a profound effect on the labor market. At the same time, there were no restrictions on employees who wished to leave the company to start their own business. California's regulatory environment created a truly free-flowing labor market. Harkening back to a landmark provision of the California Civil Code in 1872, the state provided more rights for workers and denied companies the right to enforce any restrictive employment contracts they may have created - such as non-compete agreements that prohibit an employee from competing with his or her former employer for a period of time after leaving employment.
Although such a provision arose accidentally as a result of California's fusion of Spanish, Mexican, and English legal traditions, it has had long-lasting effects. California Business and Professions Code Section 16600 states, "Any contract that restricts participation in a lawful occupation, trade, or business of any kind is void." This is different from many states that allow companies to impose restrictive labor market regulations.
Empirical evidence suggests that states like California that do not place restrictions on employee mobility promote innovative entrepreneurship. Clearly, many of the major Silicon Valley companies were founded in a broader context where the absence of non-compete agreements with former employers was a serious impediment to the creation of new businesses and regional economic development.
Barron's Book List
Venture Capital
By Tom Nichols
Translated by Tian Xuan
Published by CITIC Publishing Group