Why was venture capital born in Silicon Valley? Balun reading club

Editor Ren Peng

Editor's note: Why was venture capital born in Silicon Valley and not elsewhere? Maybe you can think of some scattered factors, such as Stanford University, NASA, Fairchild ... Tom Nicolas, a professor at Harvard Business School, believes that the birth of venture capital in Silicon Valley is mainly attributed to three factors: innovative universities represented by Stanford, the promotion of high technology by government military expenditure, and special culture, law and natural climate. Nicholas also believes that venture capital is a state of mind, which is reflected in the desire for adventure, bold innovation and the pursuit of impossible wealth through innovative investment. These factors are indispensable to promote Silicon Valley to become the birthplace of venture capital. For this reason, he wrote this book "Venture Capital" to examine the venture capital industry from a historical perspective. This article is selected from Chapter 6 of this book, Prerequisites for Venture Capital in Silicon Valley.

The history of Silicon Valley has been well recorded. Now commonly known as "Silicon Valley" refers to an area across five counties in San Francisco Bay, and its successful seeds were planted at the end of 19. Its expansion process related to venture capital is largely attributed to the intersection of three main factors: the direct and indirect influence of universities, the promotion of high technology by government military expenditure and the special culture, law and natural climate. The formation of powerful innovation clusters has created a demand for venture capital to fund people, technologies and products that have not yet succeeded.

Neglected frederick terman

It is necessary for us to push back the time and elaborate on frederick terman's contribution to the growth of venture capital industry.

Frederick terman1922 graduated from Stanford University, received a doctorate in electrical engineering from MIT three years later, and returned to his alma mater. 194 1 year, Terman became the dean of the School of Engineering of Stanford University, and 14 years later became the provost of Stanford University. In these positions, he combined science with engineering, linked academia with local companies, and formulated a strategy to achieve both academic and practical harvest. Terman is usually regarded as one of the main figures in the evolution of Silicon Valley.

What Terman did at Stanford University was not without selfish considerations. In order to improve the financial situation of Stanford University at that time, he encouraged entrepreneurs to visit the campus. But crucially, he combined the fund-raising needs with an effective university strategy. In 1937, he proposed that universities should have any patents granted to their researchers, which was approved by the university board.

This is very important because Terman firmly believes that the connection between universities and industries can be achieved by providing and sharing space. That year, Russell Varian and Sigurd Varian were invited to use the physics laboratory of Stanford University, where they started joint work, which later became the basis of radar technology. He and their academic partner William Hansen are close colleagues of felix bloch, an immigrant-born quantum physicist who became the first Nobel Prize winner of Stanford University with 1952.

Stanford University provides space and laboratory supplies and obtains patent authorization income, including the famous klystron vacuum tube patent, which is used to generate high-power microwave and used in airborne radar detection technology. Stanford University hatched the most important innovation in the 20th century, from which it got about $2 million (about $654.38+$800,000 today) in royalties.

In the early 1950s, as a continuation of his emphasis on narrowing the physical distance between academia and private enterprises, Terman designated part of the undeveloped land of the university as Stanford Industrial Park, which was mainly leased to electronic and high-tech companies. 1953, the Varian brothers opened Varian Partners' Office there, which was one of the earliest companies to settle in. Hewlett-Packard Company (Terman was one of its first investors) followed closely. By the end of 196 1, more than 25 companies had settled in this 650-acre park, with 1 1000 employees. Eventually, even mature enterprises on the East Coast, including General Electric, Eastman Kodak, Lockheed and Xerox, opened branches there. As far as Xerox is concerned, this is the Palo Alto Research Center called PARC. ) In order to make the company closer to the teachers and students of Stanford University, Terman started an honorary cooperation program on 1954, which allowed engineers of local electronics companies to take some graduate courses directly. By 196 1, 32 companies have sent more than 400 employees to Stanford University. Outside the school, Terman expanded further in nearby Menlo Park.

Stanford's vision of sharing space with industrial enterprises. Stanford Research Institute 1946 was established here, and recruited a large number of teachers who pursued "practical science" and "assisted west coast enterprises" in a way that might not be completely compatible with the traditional role of universities.

In the post-Terman era, university leaders continue to develop this powerful and valuable tradition, linking Stanford University with industry. For example, in 1964, Stanford persuaded engineers from shockley Semiconductor to open a new integrated circuit laboratory and helped the school integrate new technologies into the technology curriculum.

A few years later, Stanford University expanded the "Stanford Industrial Affiliated Program", allowing companies to use academic laboratories, contact students and teachers, attend research conferences, and conduct special recruitment activities for a small fee. For the new inventions in this joint affiliated program, the university set up a licensing office in 1969 to help the commercialization of new products. Even the smallest technology company can thrive in an environment where technological ideas are discussed and improved. Starting from 1975, Stanford University began to hold meetings of Homebrew Computer Club in the linear accelerator center of the school. The club is a gathering place for fledgling inventors and entrepreneurs, including Steve Jobs and Steven Wozniak, who want to show their latest technological inventions and share their ideas.

Venture capitalists emphasize the importance of this growing regional advantage, because "although MIT and Harvard University made great achievements, by the mid-1960s, Boston had lost to the semiconductor experts in Silicon Valley in the competition of science and technology entrepreneurship centers".

Looking back on the cause and effect of this geographical change, Arthur Locke, a famous venture capitalist, put forward a theory: "All energetic scientists grew up around Stanford University. In my opinion, although there are some special cases, it is mainly because of frederick terman. He is the dean of the School of Engineering at Stanford University. He encouraged students, especially doctors and postdocs, to set up companies and continue to teach at Stanford University. At that time, this was a brand-new concept in any other school-and it obviously didn't happen in MIT, Harvard University or Princeton University, or any excellent engineering school. People at MIT will be fired if they start a company. "

Terman is the catalyst for the development of electronics industry in San Francisco Bay Area, but it can also be said that he is the product of its development. It is worth noting that before studying for a doctorate at MIT in the early 1920s, Terman had a summer internship at Federal Telecommunications, the core startup of wireless transmission technology in Palo Alto.

In addition, although Stanford University undoubtedly plays an important role in the evolution of regional advantages of Silicon Valley, the influence of other factors is equally important. California's flagship higher education institutions have also established high-quality centers in high-tech fields. After physicist Ernest Lawrence 1939 won the Nobel Prize in physics, the University of California at Berkeley became a science center. Lawrence Berkeley National Laboratory has become a hub for the frontier development of basic science.

Gordon Moore, a revolutionary Silicon Valley engineer and entrepreneur, studied at San Jose State University before transferring to the University of California, Berkeley, and obtained a bachelor's degree in chemistry from 65438 to 0950. In 1970s, more scientists and engineers graduated from San Jose State University than Stanford University or Berkeley University, and local community colleges in California also provided important technical training courses.

The influence of these educational institutions means that capital, professional knowledge and ideas are attracted to the region, thus creating a series of economic activities and a large number of potential opportunities coexisting with risks. Once venture capital institutions start to enter, these forces will strengthen themselves.

Don't forget the demand brought by military contracting.

In 1980s and 1990s, the possibility of venture capital will decrease significantly with the increase of geographical distance between venture capital institutions and startups, even though joint investment between companies in different locations provides a channel for geographical diversification of investment portfolio. Generally speaking, it is easier to manage investments in places with similar geographical locations.

Although the positive influence of universities has helped Silicon Valley become a leading high-tech center, the huge and unexpected influence on the demand for its professional products has made it possible for it to further expand and innovate. Due to the promotion of the US military during World War II and the Korean War, the electronics companies in this area became famous all over the United States, which strengthened their early advantages. During World War I, FedEx built the Pulson arc long-wave radio station for the US Navy, which quickly became "the darling of the Navy during World War I".

Megafoss, the spin-off agency of FedEx, made a public address system for the US Navy battleships and a noise-proof microphone for airships. From1June, 1940 to1September, 1945, the scale of federal government participation increased sharply, and California obtained16.4 billion US dollars of wartime supply contracts and more than 2.5 billion US dollars of military and industrial facilities investment. In this process called "the second gold rush" by the San Francisco Chronicle, California is second only to new york and Michigan in total expenditure.

California received a lot of money for various reasons, including its expertise in technical fields related to wartime needs. Military procurement of microwave tubes is one of the technical expertise in the Bay Area, and the procurement volume has soared from several million dollars in 1940 to 65438+in 1959/30,000 dollars. With the sharp increase of military procurement, California's share in high-quality military contracts rose from 195 13% in 2000 to 26% in 19533, ahead of new york, which ranks first in military contract expenditure.

From 1955 to 1959, the military's purchase of transistors increased from1800,000 US dollars to 99 million US dollars, and the Ministry of National Defense soon became the biggest consumer of such products. In fact, until 1967, the US military consumed more than half of all integrated circuits produced by the Bay Area Company.

In view of the fact that the military is an early adopter, it imposes strict technical standards on contracted companies and reduces production costs to a reasonable range through subsidizing the learning curve. Military demand is an important prerequisite for the expansion of consumer market. For example, from 1963 to 1968, the unit price of integrated circuits dropped from 3 1.60 USD to 2.33 USD.

Entrepreneurs respond to the growing demand for high-tech products by continuing the tradition of starting new companies. Financing is usually carried out through informal mechanisms similar to those discussed in Chapter 3. Russian-born electrical engineer Alexander PoGernert Toff is an employee of Delmau Victor, a submarine antenna manufacturer in San Carlos, which was very prosperous in wartime.

1944, he took $25,000 from his boss, added his $5,000 savings and a loan from the First National Bank, and established Eminem Paikes Company to design military aircraft antennas. Later, Pognat Tofu was so successful that he had to move the company to a bigger place in less than two years. 1948, the Varian brothers raised120,000 USD for Varian's partner from friends, employees and surrounding investors, and this firm later developed into a springboard for entrepreneurs. The employees of this company founded more than 20 high-tech companies in the second half of 1960s.

Despite the guarantee of military contracting, Bay Area companies are still trying to improve productivity. 1942, the engineers of Federal Telecom designed a new vacuum tube production technology, which increased the output from 35% to over 95%. This enabled the company to expand its output, and its income increased from $47,000 per month to more than $600,000 per month. 24 1 941-1944. HP reorganized its product line of electronic measuring equipment and receivers, increasing the output value from $37,000 to $110,000, an increase of 26 times, and increasing the number of employees from 9 to 100, an increase of/kloc.

In 1949— 1959, Varian partners increased the klystron sales by 125 times, while the staff size only increased by 4 times. This makes Varian the largest manufacturer of microwave tubes in the United States, surpassing General Electric, Raytheon and American Radio Corporation.

The increase of federal funds is accompanied by the influx of human capital. From July 1940 to July 1945, California's net inflow19.87 million people. With the expansion of enterprises to meet the needs of military production, the number of employees in high-tech fields has increased to more than 58,000 by 1960. In san mateo and Santa Clara counties alone, the number of employees in the electronic component manufacturing industry increased from less than 1 000 to 1 000.

This makes San Jose the city with the highest density of high-tech workers in the United States. As a group of the best innovators came to work in the Bay Area, they attracted more highly skilled immigrants. For example, Nobel Prize winner william shockley grew up in Palo Alto. He works in Bell Telephone Laboratories in new york and New Jersey, and is a member of the transistor invention team. Then he went back to the Bay Area to take care of his mother. From 65438 to 0955 (that is, the year when he won the Nobel Prize in Physics), shockley established Shockley Semiconductor Laboratory in Mountain View, California, in order to commercialize new technologies.

When military contracting began to shrink, the endurance of enterprise activities in the Bay Area began to appear. In 1960s, U.S. Secretary of Defense robert mcnamara cut the military expenditure on high-tech equipment. For example, the total price of microwave tubes purchased by the US Department of Defense dropped from 1962 to1964+05 million. Profitable cost-plus contracts (contracts to pay production expenses and guarantee fixed expenses) helped to establish the foundation of local manufacturing industry, but the proportion of such contracts in all contracts decreased from 35% to 65,438+0960-65,438+0965%. 3 1, as a proof of the innovation ability of this region, the existing companies quickly adapt to the new reality by changing their product lines.

1934, aitel mccullough Company was spun off from Heinz Kaufman Company, a manufacturer of customized radio equipment, and developed a set of improved power grid tube production line for FM radios. Litton Engineering Laboratory was established by Charles Litton in 1932 (he has two engineering degrees from Stanford University: mechanical engineering 1924 and electrical engineering 1925). The laboratory transformed its microwave tube department into the production of microwave ovens. Varian Partners began to produce scientific and medical instruments, so that its sales to the military dropped from 90% to 40% in just eight years.

This internal resource replacement in the Bay Area represents a level of adaptability that is lacking in other places. Boston's 128 highway is home to important companies such as digital equipment companies, but it cannot be adjusted in the same way. Existing enterprises are slow to transfer product lines. For example, Raytheon is one of the most dependent companies on the east coast, and it still sold more than 55% of its production to the military in the late 1960s. The entrepreneurial wave after 1960 did not sweep the 128 expressway as it did in the Bay Area. From 1959 to 1976, more than 40 semiconductor companies have been established in Northern California, while there are only 5 new enterprises in Massachusetts.

Coupled with the inertia of existing companies, the high-tech industry on the 128 expressway lost more than 30,000 jobs in the early 1970s. From 1935 to the mid-1970s, 128 highway technology declined seriously, and employment and output began to move westward. It is no accident that venture capital is attracted to the fields with the most high-tech opportunities.

The best climate and democratic culture

If universities and military investment are tangible contributors to the surge in entrepreneurial opportunities, then the influence of Silicon Valley culture is even more intangible. Culture is difficult to define, but it is manifested in many aspects, attracting certain types of people to identify with it and helping to establish a different business atmosphere from the East Coast. Anna Lee Saxer Nyan believes that "the culture in this area encourages taking risks and accepting failure" and "no age, status or social class can prevent people from starting over".

Practical universities, together with rolling hills, sunny days and mild climate, attract people who are interested in technology, but many of them are not interested in the cold winter and more orderly order on the east coast. Robert noyce of Intel Corporation emphasized the geographical advantages of Silicon Valley when testifying in Congress on how to cultivate "the entrepreneurial and innovative atmosphere in the United States". "What attracts us to this place?" He asked, "First of all, it is one of the most pleasant places in the world. There is good weather here, at least there is terrain that was not destroyed at that time. " Intel employees can pick pears in their company's orchard in Mountain View.

New technological discoveries will be published in news media, such as Radio San Francisco. Ralph Heinz, co-founder of Heinz-Kaufman, recalled that in the electronics industry, "we learned from each other". Emerging entrepreneurs can write their own rules on the new cultural canvas without being bound by decades of traditions on the East Coast.

Cultural openness can be a powerful driving force for creativity and innovation. In the Bay Area, it helps to cultivate the technological progress that immigrants may bring. Paradoxically, in view of the relationship between the development of enterprises in the Bay Area and military technology, immigrant inventors play a key role in the development of private sector industries, precisely because they have limited employment opportunities related to national defense.

Noyce said in congressional testimony that 1985, 80% of Intel's newly hired doctors and 50% of its masters were born abroad. Noyce even joked that these people are often "better prepared than our students here". He then listed a series of high-tech research and development achievements made by immigrants. "I just want to say that the first microprocessor was completed by an Italian engineer named Federico Fagin, and the Zilog company he later formed became one of the major companies in this field," he said. "Intel's first erasable programmable read-only memory, one of our most important products, was developed by Israelis working at Intel. A Japanese engineer designed the 8080 microprocessor. Arie Faingold, an Israeli, founded Daisy Systems, a major computer-aided design/computer-aided engineering company. Philip Huang from South Korea founded Graphic, one of the most successful terminal and microprocessor/microcomputer companies in Silicon Valley. Xijiang Lai Tandeng from India founded Tandeng Computer. "

The commercial 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 "equal association" rather than a company composed of employers and employees.

Varian Partners has no detailed report, and every engineer is a partial owner. Employees vote for colleagues in the management advisory Committee to help senior engineers design company policies. Similarly, HP maintains an unconventional and decentralized organizational structure because it believes that this structure can encourage teamwork, openness and creativity. Senior managers, including the two founders, often cooperate with new engineers. Managers are encouraged to "walk around" to make employees approachable. They cultivate informal and unplanned dialogues with employees and encourage employees to pursue their own ideas.

With the popularization of this practice, a new management model came into being. Tom Wolfe wrote a famous article about Silicon Valley for Esquire magazine in February, 1983. He said: "The atmosphere of these new companies is very democratic, which shocked businessmen from the East."

Bay Area Technology Company is one of the earliest companies to provide non-monetary fringe benefits, and these benefits are also the most ambitious in design. In 1939, EMACK established an on-site medical department and subsidized canteen for its workers. Litton Industries (founded in 1947) went one step further in 1949, and purchased a large area of land around Lake Jackson in the Zelaya Mountains as a holiday resort for employees. Profit sharing and employee stock ownership plans are becoming more and more common, partly to retain talents. When electrodynamics, the main manufacturer of microwave tubes, acquired Litton on 1953, it offered stock options to every Litton management as an incentive to stay in the merged entity and participate in its operation. At that time, option-based compensation was not common.

Because it can ensure the loyalty of employees, this management practice has a far-reaching impact on the labor market. At the same time, employees who want to leave their jobs and start businesses are not restricted. California's regulatory environment has created a truly free-flowing labor market. Tracing back to a landmark clause in California Civil Code 1872, the state provides workers with more rights and denies the company the right to execute any restrictive employment contract they may set, such as a non-competition agreement that prohibits employees from competing with their original employers for a period of time after leaving their jobs.

Although this regulation was unexpectedly produced because California merged the legal traditions of Spain, Mexico and Britain, it has a long-term impact. Article 16600 of the California Commercial and Vocational Code stipulates: "Any contract that restricts participation in legal occupation, trade or any form of commercial activities is invalid." This is different from many States that allow companies to implement restrictive labor market regulations.

Empirical evidence shows that California and other states have no restrictions on employee mobility, which promotes innovation and entrepreneurship. Obviously, many large companies in Silicon Valley were established without a non-competition agreement with their original employers, which seriously hindered the establishment of new enterprises and the development of regional economy.

Barron's list

venture capital

Author: the beautiful Tom Nicholas

Translator: Tian Xuan

Press: CITIC Publishing Group