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 1970s to mid 1980s
• 1980s – 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 1960s 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
1970s – Growth, Crisis, Fabulous
Returns, and Institutionalization
VC in the 1970s
• 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 1970s Technological Cornucopia
MPUs, PCs, Datacomm, Biotech, HDD
• 1970s – MPU makes microcomputers possible
•
•
•
– PCs, work stations, game consoles
Late 1970s – PC/Workstation require ICs, magnetic
storage, and software
Late 1970s – Data communications equipment
Enormous financial successes in 1980s: Amgen,
Apple, Cetus, Genentech, Rolm, Silicon Graphics,
Sun, Tandem, 3Com, etc.
Silicon Valley Becomes Center of
Electronics World – SV VC Benefits
Routinization in the 1980s
• 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
1980s – 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 1980s –Bay Area firms invest in East
•
•
•
•
Asia or Asians in Silicon Valley
Mid 1980s –Taiwanese VC firms eye
Asians in SV
Late 1990s -- 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: VentureExpert 2011
Returns to Selected VC Limited Partners
Partnership
Date
KPCB IV
Mayfield VI
Battery II
Menlo IV
KPCB VI
Sequoia VI
Benchmark I
Accel V
KPCB VIII
1986
1987
1988
1988
1992
1992
1995
1996
1996
Source: Adapted from Steve Lissom
Distributions IRR (%)
(%)
per
annum
174
11.4
335
26.7
419
37
498
42.5
300
42.9
1231
110.8
4082
233.8
1724
195.8
1251
350.4
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?