A Historical Perspective on the Development of the

A Historical Perspective on the Development of the VC Industry in Silicon Valley* Martin Kenney UC Davis & Berkeley Roundtable on the International Economy * Prepared for a Triple Helix Conference

Outline • Early history • Formation of VC in Silicon Valley • Early 1970 s to mid 1980 s • 1980 s – VC is routinized in SV • Internet Bubble and beyond • Concluding thoughts

Early History • Already before WWII there was a long • • history of were angel investors particularly in electronics (Sturgeon 2000) Venture capital began on East Coast But would find its most conducive home in the Bay Area

1957/1958 – Change! Macro Developments • Sputnik (Space Race/Cold War accelerates) – Aerospace w/price no object • Go-go 1960 s stock markets for tech Technology • Transistor technology • Mainframes, minis, etc. • Modularity increasing New firms • Fairchild (in Silicon Valley) • Digital Equipment (in Boston)

VC Begins in SV Roughly a decade after first VC firms are formed in Boston and NYC • 1957 -- Arthur Rock of Hayden Stone in New York assists eight engineers in raising $3 million for a company to be called Fairchild • Angel investors -- Frank Chambers, Reid Dennis, William Bryan, William Edwards, etc. doing deals • 1959 -- SBICs

First VC Limited Partnership DG&A (1959 -1964) • Established in Palo Alto – Capital provided by Heller (SF), Rockefeller (NY), Lazard Freres (NY), Gadran Corp (NJ)

The 1958 Small Business Investment Corporation Act • West Coast and particularly SF Bay angel investors took advantage of Program • 1962 Formation of WASBIC – 1969 disbands to form WAVC as the SBIC format becomes less workable for VC investing AND non-SBIC VCs do not want to co-invest with SBICs.

VC Succeeds as a Business Model • Digital Equipment Corporation ARD investment of $70, 000 in 1958 worth $350 million in 1969 • Davis and Rock partnership in SV raises $3 million in 1961 returns to investors $90 million in 1969 • 1969 Edgar Heizer raises $81 million from institutional investors

1970 s – Growth, Crisis, Fabulous Returns, and Institutionalization

VC in the 1970 s • NASDAQ formed – Key role of California startups particularly Intel (first IPO) – Optimized for small tech firms • Formation of NVCA • 1973 -74 Stock market crash – Collapse of union pension funds – ERISA • 1978 NVCA lobbying loosens ERISA prudent man rule – Massive new capital in-flows

The 1970 s Technological Cornucopia MPUs, PCs, Datacomm, Biotech, HDD • 1970 s – MPU makes microcomputers possible • • • – PCs, work stations, game consoles Late 1970 s – PC/Workstation require ICs, magnetic storage, and software Late 1970 s – Data communications equipment Enormous financial successes in 1980 s: Amgen, Apple, Cetus, Genentech, Rolm, Silicon Graphics, Sun, Tandem, 3 Com, etc. Silicon Valley Becomes Center of Electronics World – SV VC Benefits

Routinization in the 1980 s • Local law firms specialize their VC • practices Silicon Valley becomes the center of the U. S. VC industry (over 30 percent of total U. S. investment) – VCs move to Stanford area from SF and East Coast • Business plans increasingly professional • Entrepreneurs learn the venture process

1980 s – VC Rountinized 1982 1981

1982 Man of Year Notice it is a PC The ultimate validation

The ultimate validation of VC

Routinization • Congress recognizes VC as an important part of U. S. innovation system 1983 Hearings

Geography -- The Inexorable Draw of SV • Morgenthaler Associates – Cleveland • Norwest Capital – Minneapolis • Accel – New Jersey Chen et al. (2008) summarize, “Even after controlling for experience, firms based in the San Francisco/San Jose CSA are 50% less likely to open branch offices than are venture capital firms based in other locales.

Silicon Valley VC Goes Global • Mid 1980 s –Bay Area firms invest in East • • Asia or Asians in Silicon Valley Mid 1980 s –Taiwanese VC firms eye Asians in SV Late 1990 s -- Europe and espec. Israel Internet Boom – invest in China 2001 -- India

Venture Capital Disbursements by Region, 1980 - 2010 The Biggest Wave of Them All Source: Venture. Expert 2011

Returns to Selected VC Limited Partners Source: Adapted from Steve Lissom

In 2001 - 2006 – the most difficult time since 1974 -79. Many VC firms that raised money in 1999 and 2000 are winding down

In 2010 – Twitter, Zygna, Facebook, Linked In, and Groupon save the day!

Concluding Remarks • To have Stanford, Berkeley and UCSF in the same region is an incredible blessing • SV VC has taken advantage of waves of technical change and particularly electronics/digitization • Is digitization slowing in creating new needs and opportunities?

Concluding Remarks • Can something replace digitization? • Green, Nano, Biotech ? • Will the billion dollar funds can provide a VC-like return? – Will Green Tech ever make any money for VCs

Concluding Questions • Will stock markets recover and be seen as reasonable place to invest? – Lack of regulation is not good it harms markets – Two huge drops in less than a decade

BUT for the last sixty years a new technological wave has always come in Questions?