03/21/95

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Social infrastructure may be key to Silicon Valley economy, dean says

STANFORD -- For those who dream of creating or investing in a new high tech company, James Gibbons, dean of engineering and consummate watcher of Silicon Valley firms founded by former Stanford students, listed four requirements at a March 16 campus talk sponsored by the Institute of Electrical and Electronics Engineers:

• Infrastructure. Start-ups are more likely to succeed in areas that have both the technical and social infrastructure to support them. If you want to start a high-tech company, the San Francisco Bay Area is probably a better place to do it than Tokyo, Minneapolis or even along Boston's Route 128.
• Ideas. High-tech start-ups usually begin with ideas generated in university or corporate research labs. The more revolutionary the idea, the longer it will take to tell if the start-up will be a success or failure. It may take 10 to 20 years to know if a revolutionary idea, such as superconductivity, will pay off in a big way for a business such as the Bay Area's Conductus, but just two to five years to know if a company will be successful at introducing a new product based on a technology known to work.
• People. Start-ups require a "highly qualified, highly dedicated team of people working long hours," and those people usually come from a university R&D team or from more established corporations. "The original silicon company in Silicon Valley was [Stanford faculty member] Bill Shockley. Out of Shockley came Fairchild, and out of Fairchild came National [Semiconductor] and lots of others," Gibbons said.
• Money. The principal sources of capital are firms that engage in major investments for the sake of making a profit, not because they are impressed with the technology involved. "Half of the venture capital in the United States is managed out of 3000 Sand Hill Road back here in the foothills toward [Interstate] 280."

The technical infrastructure a community needs to breed start-ups includes:

• Cheap space that is appropriate for the work to be done. "At any given time, there is probably 3 or 4 million square feet of space between [Stanford] and San Jose available for you if you want to start a company. You don't have to use the venture capital to build space," Gibbons said.
• Easy access to high-quality basic technology that allows the start-up to focus on its main idea. In the Silicon Valley, "if you need to have glass blown, or metal bent, or whatever, there are lots and lots of little firms out there that specialize in doing that for anybody, including a start-up. You don't find it in St. Louis; you don't find it in Minneapolis; it's hard to find it in Boston. . . . It's available in spades in the Silicon Valley."

Social infrastructure may be even more important, Gibbons said. The social characteristics of the valley that encourage successful start-ups include a general attitude that says "it's OK to fail, it's OK to talk, it's OK to change."

In Silicon Valley, start-ups often are formed by former employees of one company who then compete against former colleagues. "In Japan it's not OK to change companies, and if you do, it's not OK to compete with the people you just came from."

There is also little stigma attached to failing at a start-up company in Silicon Valley, he said. "You find lots of venture capitalists who think it's an advantage for somebody to have failed and gotten burned, because he's now not going to make those same mistakes."

It's also OK for competitors to share information. "A competitor won't tell you something that is critical to his strategic path, but there are a lot of other issues that he knows answers to, problems he understands, and he's quite happy to talk to you about them." Information sharing between engineers, CEOs and other employees, Gibbons said, "makes it easy for people to learn fast and not spend a lot of time working on irrelevant issues."

Role of universities

Stanford's role in creating profitable high-tech companies is not so much the "spin-out of Stanford-based technology" as people often assume, Gibbons said. The university does earn revenue from licensing ideas developed on campus, but the total economic value of those ideas is "more important to Stanford than to the Silicon Valley," he said. More important to the valley is Stanford's contribution to the social infrastructure in the form of a pool of talented graduates.

In an attempt to get an estimate of that type of contribution, Gibbons added up the 1988 revenues of 50 valley technology companies whose founders included at least one Stanford graduate. The revenues from those companies totaled approximately $25 billion, he said, or more than half of the $40 billion in revenues that Data Quest estimated for the entire high-tech segment of Silicon Valley in that year. The Stanford- related companies included older giants like Hewlett-Packard and Varian, younger giants like Sun Microsystems, and some firms that were just starting out. The firms, he said, tend to grow fast at first, and then more slowly unless they move in a new direction, as Hewlett-Packard did when it decided to get into the computer business.

"It's not true that most of the businesses that Stanford students start are started from patents that occurred at Stanford. What is true is that the students get out there and work for a while at Hewlett- Packard or some place else [in the valley]. They get an idea about something they want to do, they form a team, the space is there, the money is there, and they go do it.

"The key here is the students. The environment and the research [at Stanford] is important [to the valley] for the way we educate the students," he said.

The Massachusetts Institute of Technology has a similar relationship to Massachusetts' high-tech industry, which is concentrated along Route 128, he said. A recent study, however, by Anna Lee Saxenian of the Institute of Urban and Regional Development at the University of California-Berkeley, indicates that Silicon Valley's high-tech employment has grown at a much faster rate since 1960 than has that of Route 128. In her 1994 book, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Saxenian reports that the high-tech employment of Route 128 increased from 61,000 jobs in 1960 to 150,000 in 1990, whereas Silicon Valley employment increased from 17,000 to 268,000.

The difference, Gibbons said, both he and Saxenian attribute to "the difference in infrastructure and the social characteristics" of the two regions.

"Venture capital is available everywhere; good ideas are always out there. You can analyze the market whether you are here or on Route 128. I think the essential difference is the infrastructure."

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