Unit 6, Listening 2, America’s Magnet for Innovation and Investments

America’s Magnet for Innovation and Investments

Renee Montagne, Host: Think of the most technologically innovative companies of the last 50 years—Intel, Apple, Google, Facebook, Twitter. Each one has a Silicon Valley address, and each one got backing from venture capitalists. Over the last decade, more than a third of the nation’s venture capital has gone into Silicon Valley, and much of it has come from there, as well. In our series on the history of Silicon Valley, NPR’s Laura Sydell has this story on how venture capital and high tech grew up together.

Sydell, byline: When tech entrepreneurs go looking for money, they can easily end up here: University Avenue in downtown Palo Alto, with its clean brick sidewalks and high-end boutiques. Bill Reichert is a venture capitalist.

Reichert:       Within five blocks of here, there are probably between 30 and 40 venture capital firms. And there are probably also about 30 or 40 start-up companies that have been funded by venture capital firms.

Sydell:           Reichert is a co-founder of Garage Technology Ventures. One of his firm’s best investments was the streaming music service Pandora. In his third-floor office, Reichert searches for another winner.

Reichert:       Hey, hey.

Virginia Klausmeier: Hi.

Reichert:       Good to see you. Thanks for coming in.

Klausmeier: Of course.

Montagne:    This is Silicon Valley ritual: A passionate, young entrepreneur asking the venture capitalist for money.

Klausmeier: So, my name is Virginia Klausmeier. I am the co-founder and CEO of Sylvatex. So, we developed a fuel technology company . . .

Montagne:    This is Klausmeier’s third presentation to Garage Technology Ventures. She needs over a million dollars to support the next phase of her clean diesel fuel.

Reichert:       Originally, you were going to make tankers full of your stuff, right?

Klausmeier: Yeah.

Sydell:           Bill Reichert is trying to figure out if his firm should make an investment in her technology.

Reichert:       We see lots of brilliant innovations, any one of which could be economically exciting. But we’re trying to pick the ones that are the most successful.

Sydell:           And if Reichert picks right, he can win big. He could bring back returns 20 times over for himself and his investors. He could find the next Facebook, Google, or Apple. As hard as it may be for an entrepreneur like Klausmeier to get money, it used to be harder in the days before venture capital. In 1938, Bill Hewlett and David Packard used the bootstrap method[1]. They started tinkering[2] in a garage, backed by $500 and a used drill press. It took a long time to build HP. The other method back in the day was, know the right people. UC Davis Professor Martin Kenney, a venture capital historian, says industrialists like Henry Ford and Andrew Carnegie asked friends and business contacts for money.

Kenney:        And you would go to that person and maybe have a business plan, but often not have a business plan, and explain your idea. And if you were properly socially connected—that was very important—that individual might put some money in your young firm.

Sydell:           The big change in how you could fund your company began here in Silicon Valley.

Leslie Berlin: The origins of the modern venture capital industry—of connecting high-tech brains with money—took root here in the Valley in 1959.

Sydell:           Silicon Valley historian Leslie Berlin.

Berlin:           People were interested, in the late 1950s, in electronics. They didn’t know how it worked. They didn’t know what it did, but they thought it was going to be a big deal.

Sydell:           Back then, the area had the beginnings of a tech sector. William Shockley, who co-invented the transistor[3], had his lab here. Stanford University opened its Industrial Park, where companies like Lockheed, GE, and Hewlett Packard had facilities. So, three men decided to establish a firm in Palo Alto.

Berlin:           Specifically with a plan to invest in small technical companies.

Sydell:           The three men were retired World War II Generals William Draper and Frederick Anderson, and a former Ford Foundation president, Rowan Gaither. There was some venture capital on the East Coast, but DG&A set up a new kind of structure for investing that is widely seen as the precursor[4] to today’s venture capital firms. Here’s how it works: The VCs[5] go out and find new companies. The VCs match investors with new companies. The VCs get a cut of any profits and, key to the arrangement, the investors aren’t liable[6] for any legal problems at the start-up. Draper, Gaither & Anderson got $6 million worth of investment, says historian Leslie Berlin, and they had to find a place to put it.

Berlin:           People who worked at Draper, Gaither, Anderson would describe driving around to little companies and saying, basically, do you need any money? And they had a hard time finding people who were willing to take it, because it sounded so shady[7]. Wait a second. These people want to just give me money? Why?

Sydell:           But Draper, Gaither & Anderson didn’t do that well. It was another Silicon Valley firm that made venture capital the way to go.

Arthur Rock: There’s no way, that I know of, other than finding a gold mine, of making as much money as you can in technology.

Sydell:           Arthur Rock was the co-founder of the venture firm Davis and Rock in 1961. The firm hit it really big with an investment in Scientific Data Systems, or SDS—one of the first companies to use microchips[8] in computers. Davis and Rock invested close to $260,000. Eight years later, Xerox purchased SDS for almost a billion dollars. In 1968, Rock brought together the funding for another new company. Its name was Intel.

Rock:             And it’s probably the only company I ever invested in that I was 100 percent sure would work out.

Sydell:           Boy, were you right.

Rock:             Yes, I was right on that one.

Sydell:           Venture capital firms popped up all over the area. It was soon dubbed Silicon Valley. Modern venture capital funding helped build Apple, eBay, Yahoo, Google, and Facebook. Perhaps those companies, or businesses like them, were destined to happen. But if their founders had to bootstrap it or get loans from a bank, it would have taken much longer. UC Davis Professor Kenney says venture capitalists are more willing than banks to take a risk, and so the VCs sped up the pace of innovation.

Kenney:        And brought new technologies forward that may have come about, but certainly would have taken much longer. It also gave an opportunity to brilliant engineers and entrepreneurs to actualize their technological dreams.

Klausmeier: OK, so, where are we at today? We are successfully in the validation[9] phase.

Sydell:           Back in the third-floor offices of Garage Technology Ventures in Palo Alto, Virginia Klausmeier is trying to sell her dream of making clean tech fuel developed by her late father.

Klausmeier: He was the chemist behind the whole technology. He was my mentor, worked on . . .

Sydell:           Klausmeier left her home in Oregon to start her company in Silicon Valley. She thinks if you are a young tech entrepreneur, this is the place to be, much the same way Hollywood draws young actors and filmmakers.

Klausmeier: You know, you need to be around people that believe in you on many different levels, and this is the place. Everyone does believe that you can create change, you can make a big impact and that you can do it in a short amount of time, and that it’s going to be profitable. And they’ll invest in you and make it happen. And it is just so inspirational.

Sydell:           While there are other contenders, Silicon Valley remains the premier destination for tech entrepreneurs with a dream. And as venture capitalists discovered decades ago, backing the right technology is like discovering a gold mine. Laura Sydell, NPR News.

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[1] use the bootstrap method: idiom to start something without anyone’s help

[2] tinker: verb to attempt to repair in a casual/unprofessional way

[3] transistor: noun a small electronic device to control electrical current

[4] precursor: noun something that came before another thing

[5] VC: noun a venture capitalist

[6] liable: adjective legally responsible for paying the cost of something

[7] sound so shady: idiom sound suspicious

[8] microchip: noun a very small piece of a material with the electrical connections that make a computer work

[9] validation: noun the act of stating officially that something is of an acceptable standard