(2009-10-27) Blank Rise Risk Capital

Steve Blank on the rise of Risk Capital (Venture Capital) in Silicon Valley. At Stanford, Dean of Engineering Fred Terman wanted companies outside of the university to take Stanford's prototype microwave tubes and electronic intelligence systems and build production volumes for the military. While existing companies took some of the business, often it was a graduate student or professor who started a new company. The motivation in the mid 1950's for these new Start Up-s was a crisis - we were in the midst of the Cold War and the United States military and intelligence agencies were rearming as fast as they could. Yet one of the most remarkable things about the boom in microwave and silicon startups occurring in the 1950's and 60's was that it was done without Venture Capital. There was none. Funding for the companies spinning out of Stanford's engineering department in the 1950's benefited from the tight integration and web of relationships between Fred Terman, Stanford, the U.S. military and intelligence agencies and defense contractors. These technology startups had no risk capital - just customers/purchase orders from government/military/intelligence agencies... In 1946 Jock Whitney started J H Whitney Company by writing a personal check for $5M and hiring Benno Schmidt as the first partner (Schmidt turned Whitney's description of "private adventure capital" into the term "Venture Capital")... They almost exclusively focused on the East Coast.

In 1946, George Doriot, founded what is considered the first "venture capital firm" - American Research & Development (ARD). A Harvard Business School professor and early evangelist for entrepreneurs and entrepreneurship, Doriot was the Fred Terman of the East Coast. Doroit had the right idea with ARD (funding startups out of MIT and Harvard and raising money from outsiders who weren't part of a private family) but picked the wrong model for raising capital for his firm. ARD was a publicly traded venture capital firm (raising $3.5 Million in 1946 as a closed-end mutual fund) which meant ARD was regulated by the Securities and Exchange Commission (SEC.) For reasons too numerous to mention here, this turned out to be a very bad idea. (It would be another three decades of experimentation before the majority of venture firms organized as limited partnerships.)

It wasn't until the rise of the semiconductor industry and a unique startup culture in Silicon Valley that entrepreneurship became associated with the West Coast... One of the ironies in Silicon Valley is that the two companies which gave birth to its entire semiconductor industry weren't funded by venture capital. Since neither of these startups were yet doing any business with the military--and venture capital as we know it today did not exist, they had to look elsewhere for funding. Instead, in 1956/57, Shockley Semiconductor Laboratory and Fairchild Semiconductor were both funded by corporate partners - Shockley by Beckman Instruments, Fairchild by Fairchild Camera and Instrument.

Post2: Silicon Valley first caught the eyes of east coast investors in the late 1950's when the valleys first three IPO-s happened: Varian in 1956, Hewlett Packard in 1957, and Ampex in 1958. These IPOs meant that technology companies didn't have to get acquired to raise money or get their founders and investors liquid. Interestingly enough, Fred Terman, Dean of Stanford Engineering was tied to all three companies.

• SBIC: By 1968 over 600 SBIC funds provided 75% of all venture funding in the U.S.

• Limited Partnership: By the 1970's the limited partnership would become the preferred organizational form for venture investors.