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A Historical Perspective on the Development of the VC Industry in Silicon Valley* Martin Kenney UC Davis & Berkeley Roundtable on the International Economy.

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Presentation on theme: "A Historical Perspective on the Development of the VC Industry in Silicon Valley* Martin Kenney UC Davis & Berkeley Roundtable on the International Economy."— Presentation transcript:

1 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

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

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

4 1957/1958 – Change! Macro Developments Sputnik (Space Race/Cold War accelerates) Sputnik (Space Race/Cold War accelerates) – Aerospace w/price no object Go-go 1960s stock markets for tech Go-go 1960s stock markets for techTechnology Transistor technology Transistor technology Mainframes, minis, etc. Mainframes, minis, etc. Modularity increasing Modularity increasing New firms Fairchild (in Silicon Valley) Fairchild (in Silicon Valley) Digital Equipment (in Boston) Digital Equipment (in Boston)

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

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

7 The 1958 Small Business Investment Corporation Act West Coast and particularly SF Bay angel investors took advantage of Program West Coast and particularly SF Bay angel investors took advantage of Program 1962 Formation of WASBIC 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.

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

9 1970s – Growth, Crisis, Fabulous Returns, and Institutionalization

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

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

12 Routinization in the 1980s Local law firms specialize their VC practices 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) 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 Business plans increasingly professional Entrepreneurs learn the venture process Entrepreneurs learn the venture process

13 1980s – VC Rountinized

14 The ultimate validation 1982 Man ofYear Notice it is a PC

15 The ultimate validation of VC

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

17 Geography -- The Inexorable Draw of SV Morgenthaler Associates – Cleveland Morgenthaler Associates – Cleveland Norwest Capital – Minneapolis Norwest Capital – Minneapolis Accel – New Jersey 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.

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

19 Venture Capital Disbursements by Region, Source: VentureExpert 2011 The Biggest Wave of Them All

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

21 In – the most difficult time since Many VC firms that raised money in 1999 and 2000 are winding down

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

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

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

25 Concluding Questions Will stock markets recover and be seen as reasonable place to invest? 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

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


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