Entrepreneurial Growth An examination of the entrepreneurial growth potential of three of US s top entrepreneurial hot spots. Remy Arteaga http://blog.remyarteaga.com http://twitter.com/remyarteaga remy@bluerockinnovation.com
Table of Contents 1. Overview...2 2. Entrepreneurial Growth Potential Framework...2 3. Entrepreneurial Hot Spots...3 3.1 North Carolina Research Triangle...3 3.1 - a) History...3 3.1 - b) Main Players...6 3.1 c) Successes...7 3.1 d) Framework Analysis...7 3.2 Boston, MA Route 128...10 3.2 a) History...10 3.2 b) Main Players...12 3.2 c) Successes...12 3.2 d) Framework Analysis...13 3.3 Silicon Valley...16 3.3 a) History...16 3.3 b) Main Players...17 3.3 c) Successes...17 3.3 d) Framework Analysis...18 4. Conclusion... 21 remy@bluerockinnovation.com 1
1. Overview This paper investigates the development of three recognized entrepreneurial hot spots in the United States The Research Triangle, Silicon Valley and Boston. For each region we discuss the history, main players and successes. We also analyze each region s entrepreneurial growth potential; then compare and contrast that potential. In order to analyze a region s entrepreneurial growth potential, one must first define what is meant by entrepreneur and by close association innovation. The terms entrepreneur and innovation are widely used, yet often misunderstood by the public, academics, professionals and government officials. Ask ten people about the difference between an entrepreneur and an innovator and you will get ten answers. According to The National Commission on Entrepreneurship, entrepreneurs are men and women who lead small companies that are based on an innovation and are designed to grow quickly at an annual rate of 15 to 20 percent. 1 Two key aspects of this definition are fast growth and innovation. According to leading scholars and professionals, innovation deals with an idea or invention and the commercialization of that idea or invention. 2 2. Entrepreneurial Growth Potential Framework Since entrepreneurship is so intimately tied to innovation, this investigation incorporates Michael Porter s Diamond (Determinants of National Advantage), which is used to examine a region s structural and environmental conditions that contribute to the region s innovative capacity. In addition, this framework examines key characteristics that can contribute to a region s entrepreneurial growth rate. The following is a more detailed description of the elements that make up the framework used in this analysis. Porter s Diamond 3 Factor conditions. Achieving high levels of innovation and productivity growth depends on the presence of high quality and specialized pools of human resources, applied technology, infrastructure and even sources of capital that are tailored to the needs of particular industries. Demand conditions. The quality of demand in a region has a strong influence on the process of creating and improving products and services. Sophisticated customers in the region press firms to improve and offer insights into existing and future customer needs. Context for firm strategy and rivalry. The rules, incentives, and pressures governing the type and intensity of local rivalry have a fundamental influence on productivity policies that encourage investment, protect intellectual property, and foster productivity growth. Related and supporting industries. Local sourcing from capable suppliers based in the region can enhance productivity and improve the capacity for innovation through allowing quicker and less costly communication, fostering the flow of ideas, and enhancing flexibility through outsourcing. 1 Kaufman Foundation, Entrepreneurship a Candidates Guide, 6 2 http://www.bluerockinnovation.com 3 Hitt, Ireland and Hoskisson, Strategic Management, 6 th Edition 2005 remy@bluerockinnovation.com 2
These four areas of the diamond shown above are self-reinforcing and act as a system. Regional rivalry, for example, stimulates the development of unique pools of specialized skills and the formation or attraction of specialized suppliers. Active local rivalry also upgrades regional demand by creating more demanding customers. 4 In addition to the above conditions, this paper will also examine three areas that interact with Porter s Diamond 5 : Government: Government affects competitiveness through its influence on the business environment (Michael Porter). Collaborative Institutions: According to Porter, institutions for collaboration are formal and informal organizations and networks that (1) facilitate the exchange of information and technology; and (2) foster various kinds of local coordination and collaboration that can improve the business environment in the overall economy or in a cluster. Attitudes: Attitudes, values, and beliefs about the economy which are often termed culture bear on the behavior and aspirations of individuals, firms, and other institutions in a region. (Michael Porter) Finally, this paper examines for each region, certain key characteristics that have been identified with entrepreneurial growth. The characteristics examined are 6 : Distinct And Unique Strategy Many Different Paths To Success Strong Leadership, Careful Preparation, And Planning Long-Term Commitment Commitment To Develop Benefits For The Whole Community Culture Compatibility Between Region & Innovation Strategy Ongoing Candid And Pragmatic Evaluation & Adaptation 3. Entrepreneurial Hot Spots 3.1 North Carolina Research Triangle 3.1 - a) History The term Research Triangle has been generally used to refer to the geographic area defined by Duke University in Durham, North Carolina State University in Raleigh, and the University of North Carolina at Chapel Hill. Within Research Triangle is Research Triangle Park, a well-defined area of 6,900 acres, and within its incorporated boundaries are 137 organizations with over 41,600 employees, including 104 research companies with over 40,000 research employees (See Figure 3.2). Although RTP is considered the largest research park in the United States both in terms of employees and acreage, and arguably the 4 Michael Porter, Clusters of Innovation, 2002 5 Michael Porter ibid, 11 6 Ravi C. Gupta, Accelerating Regional Innovation and Entrepreneurship, 2003 Global Business and Technology Association International Conference remy@bluerockinnovation.com 3
most notable, the Park was not an instant success. In fact, it took the Park almost 20 years to develop into its current form. Although the initial concept for the Research Triangle Park (RTP) emerged from a meeting held in 1954 by Brandon Hodges, the state treasurer of North Carolina, Robert Hanes, the president of Wachovia Bank and Trust Company, and Romeo Guest, a Greensboro building contractor who some say gave birth to the idea of a research park in the triangle area 7 ; RTP did not truly emerge until 1965. That was the year that Governor Terry Sanford announced that the U.S. Department of Health, Education, and Welfare had selected the Research Triangle Park for its $70 million National Environmental Health Sciences Center and that after seven years of courting, IBM had finally agreed to locate a 600,000- square foot research facility on 400 acres in the Park. 8 While new tenants continued to enter the Park over the ensuing decades, there was one key event that distinguishes the Park from all other science parks both in the United States and in other countries. 9 The event occurred when Archibald (Archie) Davis, the Research Triangle Foundation s president charged the leadership of Duke University (President Terry Sanford) and the University of North Carolina (President William Friday) to formulate a plan to ensure the continued presence of the three sister institutions in the Park, for the Park began with those institutions at its core and their continued presence would be needed for its ultimate prosperity. 10 7 Albert L. Link, Johnt T. Scott, The Growth of Research Triangle Park, September 2000 8 Albert L. Link, ibid 9 Albert L. Link, ibid 10 Albert L. Link, ibid remy@bluerockinnovation.com 4
Figure 3.1 - Research Triangle Development (Adapted from Michael Porter s Timeline) remy@bluerockinnovation.com 5
3.1 - b) Main Players Figure 3.2 - Research Triangle Park 11 There were a number of key (main) players involved in the development of the Research Triangle. The first two were Brandon Hodges and Romeo Guest who in 1955 enlisted the support of key deans and faculty at North Carolina State 12 and through Chancellor Carey Bostian took the concept of the triangle to Governor Luther Hodges. Although not immediately sold on the idea, Governor Hodges was instrumental in organizing the Research Triangle Committee (RTC) which was charged with developing and deploying the concept. The next key player was Archibald (Archie) Davis who was approached by Governor Hodges to attract investments for the Research Triangle. Davis did so and went on to establish and become the president of the Research Triangle Foundation. In his role as president Davis charged the leadership of Duke University (President Terry Sanford) and the University of North Carolina (President William Friday) to formulate a plan to ensure the continued presence of the three sister institutions in the Park, for the Park began with those institutions at its core and their continued presence would be needed for its ultimate prosperity. From this charge came the creation of the park within a park [which] was to be called the Triangle Universities Center for Advanced Studies, Inc. (TUCASI)... Thanks to the vision of Davis and his leadership and that of Sanford and Friday (and others over the years), there are today six organizations on the TUCASI campus: the National Humanities Center, the Microelectronics Center of North Carolina, the North Carolina Biotechnology 11 National Clusters of Innovation Meeting, Washington DC 2001 12 Albert L. Link, Johnt T. Scott, The Growth of Research Triangle Park, September 2000 remy@bluerockinnovation.com 6
Center, Sigma Xi, the National Institute of Statistical Sciences, and the Burroughs Wellcome Fund. These organizations are an outward reflection of the universities core values and as such, TUCASI is an intangible asset that makes Research Triangle Park unique and helps to attract new organizations into the area. 13 3.1 c) Successes An interesting but predictable dynamic has taken shape in The Research Triangle. Major corporations like IBM and Glaxo Smith Kline have led to numerous start up ventures. In fact RTP is home to many top firms in biotech, pharma and communications including GlaxoSmithKline, BASF, Bayer, Novo Nordisk Biochem, Nortel Networks, Alcatel, Cisco Systems, and Sumitomo Electric, and IBM. One of the early successes began in 1959 when Chemstrand purchased 100 acres from (then) Pinelands Co. (now the Research Triangle Park) and started construction of the first major corporate laboratory in the region. (Porter) Another important player in the formation of start ups has been The North Carolina Biotechnology Center which has assisted triangle start-ups such as Inspire Pharmaceutical Inc.; Quintiles, Icogen; Sun Technologies Group; Triangle Laboratories Inc.; MiCell, a company developing environmentally safe dry cleaning products; Xanthon Inc., a drug discovery company; and AlphaVax, which is developing vaccines from alpha viruses. (Porter) Duke University s efforts have been equally noteworthy. Duke University has spun off 14 companies, including Trimeris Inc. and Volumetric Imaging Inc., and earns $1.5 million a year from licensing fees. Its total revenues from licensing fees, royalties, stock dividends, and collaborative research funding are about $77 million a year. (Porter) The centerpiece of the state s initiatives in the field, the Microelectronics Center of North Carolina, was conceived as a specialized research and development institute and launched in 1980 with funds from the General Assembly. For example, Cronos Integrated Microsystems owes its origins to the Microelectronics Center of North Carolina. In April 1999, the MEMS Technology Applications Center spun off from the Microelectronics Center of North Carolina and became Cronos, a for-profit company. Just one year later, JDS Uniphase, a fiber optics component supplier, acquired Cronos in a stock transaction worth more than $750 million dollars. Since the Microelectronics Center of North Carolina owned a third of Cronos, its stake was worth $250 million. (Porter) 3.1 d) Framework Analysis Environmental and Structural Conditions Factor conditions Workforce - Large number of scientists, engineers and skilled technicians Location - Central geographic location to serve the Southwest and Mid-Atlantic Region 13 Albert L. Link, Johnt T. Scott, The Growth of Research Triangle Park, September 2000 remy@bluerockinnovation.com 7
Universities - Nationally recognized universities: Duke, North Carolina State University and University of North Carolina at Chapel Hill R&D - Diversity of research institutions: > 10 specialized research centers - Receives greater that 6 to 7 times the national average of federal funding per worker. - University business friendly environment. North Carolina State University has a long history of working with businesses Quality of Life - Considered to be High: Mountains, beaches, mild winters, small town feel, business friendly attitude, close to Atlanta and DC o Disadvantages Education - Relatively weak k-12 educational system Supply of Risk Capital and VC - Risk capital and VC expertise not abundant Physical Infrastructure - Above average communications - Limited air and road transportation Demand conditions Sophisticated and demanding buyers in core clusters Buyers often have special needs that impact final products o Disadvantages Infrequent feedback from customers Context for firm strategy and rivalry Numerous successful start ups o Disadvantages Few firms headquartered in region Low level of competition in selected clusters Related and supporting industries remy@bluerockinnovation.com 8
Strength across a wide range of information technology sub-clusters o Disadvantages Government Limited breadth in key clusters (e.g., communications) Weaknesses in specialized suppliers High levels of R&D funding NIH and EPA demand for bioscience technology o Disadvantages Poor coordination by local governments Digital divide as NC ranks 45 th for households with computers Rural Urban divide as counties bordering the Research Triangle have ½ the average wage and five times the jobless rate. Collaborative Institutions Both formal and informal networks created to encourage business and start ups include: - Centennial Campus - Research Triangle Institute - Research Triangle Park - Research Triangle Regional Partnership - Informal groups at corporations and universities - The Council for Entrepreneurial Development - The North Carolina Biotechnology Center - The North Carolina Electronics and Information Technologies Association o Disadvantages Attitudes None o Strong business oriented attitudes which stem from the creation of the Research Triangle Entrepreneurial Characteristics Distinct And Unique Strategy Many Different Paths To Success remy@bluerockinnovation.com 9
o Focused from the start to increase collaborative research. Even today, 76% of the businesses located in the triangle focus on university scientific research. 14 Strong Leadership, Careful Preparation, And Planning o The history above discusses the leadership from people in government, business and academia including Governor Hodges and Archibald Davis. Long-Term Commitment o Although the Research Triangle got its start in 1954 it was not until the mid 70 s before it began to prosper. During that time the foundation remained committed to funding and evolving RTP. Commitment To Develop Benefits For The Whole Community o The impetus for the Research Triangle stemmed from the academic community s concern about the out migration of its better college graduates and began a dialogue with the state s economic development leaders about ways to attract new industries to North Carolina. 15 The focus was on leveraging the resources of the three universities to improve the community. Culture Compatibility Between Region & Innovation Strategy o The Research Triangle has a business friendly culture that encourages the transfer of information between universities and business. Not only is information transferred but so are people who move from academia to business and business to academia. Institutions have been put into place to encourage start ups and businesses, like the Biotechnology Center and Centennial Campus. Informal and formal networks encourage the exchange of ideas and drive entrepreneurship. Ongoing Candid And Pragmatic Evaluation & Adaptation o The leadership in the Research Triangle continues to evaluate and adapt to changing conditions. The region seems to be acutely aware of its position and constantly looks to improve itself. For example the Greater Triangle Regional Council was formed in 1993 to identify long-range strategies to improve the quality of life and economic effectiveness of the Research Triangle region. 16 Another new initiative is the Centennial Campus [which] is North Carolina State University s technopolis, a mix of university, corporate, and government R&D facilities and business incubators currently being developed with plans for a town center, executive conference center and hotel, housing, and recreational facilities. 3.2 Boston, MA Route 128 3.2 a) History In the 1930 s, the Boston area began to loose the traditional industries that had been the economic driver of the region. The textile, machine tools and shoe manufacturers began 14 Gupta, 3 15 Link etal., 3 16 Porter, 92 remy@bluerockinnovation.com 10
to move to the South because it offered less expensive operating costs. The six governors of New England were concerned about the decline of the economy and formed the New England Council in 1925 with the intention of renewing the area. 17 The first steps taken were to reduce taxes, complete exploratory studies, and run publicity campaigns with the objective of brining back the businesses that had left the area. This effort did not succeed and the council needed to take a different approach. It then focused on trying to develop new industry by taking advantage of the unique infrastructure the area had due to its concentrated academic institutions and government research laboratories. 18 As discussed in H. Etzkowitz s article entitled the Triple helix of regional growth and renewal, the area had the ingredients for new business and industry, but it required the instruments to supply funding for the new ventures. This spurred the creation of the first Venture Capital Firm after World War II called American Research and Development. The institutions involved owned shares of the firm, but the work was initially pro-bono and done by business school graduates from MIT and Harvard. The first head of ARD was a Harvard business school professor, Georges Doroit. The firm had several elements: A search mechanism where a team of students would look through their schools in search of new technologies. An evaluation procedure where a board of senior professors would evaluate the technologies presented and provided leads for the most promising ones. Business development advice (consulting) was given to new companies. Leadership and networking expertise was provided by the head of the firm (today s equivalent of the General Partner) in moments of crisis. The firm s management would be connected to further financing and academic networks. 19 Within the university and research labs, there were uncompleted R&D projects that had been funded by the government for the war effort. Once the war was over, some of these projects and technologies could be commercialized. Out of this movement, Digital Equipment Corporation was formed (the founder of the first mini-processor). Government contracts continued in the area through the mid-1970 s, until the Vietnam War and the race to space efforts wound down. Fewer government contracts and increasing competition from Silicon Valley led to a significant drop in the computer technology industry of Route 128. Over 50,000 technologists lost their jobs by the late 1980 s. 20 A second wave of firm formation began to occur in the same time period that Boston was loosing its computer technology industry. The area academic institutions had committed 17 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 18 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 19 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 20 Watkins, Thayer Notes on Anna Lee Saxenian s Regional Advantage. Harvard University Press 1994. remy@bluerockinnovation.com 11
to molecular biology, a relatively new field at the time. This shifting focus correlated with the growing biotechnology industry and an increasing interest from Venture Capitalists. The infrastructure that had been created after World War II helped to foster this new wave of industry. 21 3.2 b) Main Players There were several notable individuals that played a major role in the development of Route 128 (the area named after a road constructed to allow easier navigation across the city along which several industry complexes developed). One of the most critical before World War II, was Karl Compton, a member of the New England Council and the president of MIT at the time. Compton shifted the university s focus from one of supporting existing industry to one that was a source for new industry. Compton played a major role in creating ARD (the first VC firm) after World War II by gathering influential individuals from universities, insurance agencies and investment banks together into a consortium. 22 Another important person in the regional development efforts was Vannevar Bush, the Dean and Vice President of MIT in the late twenties. He was heavily involved in the revitalization efforts and was mostly responsible for the new model Compton had presented for MIT. Bush understood the difference between invention and innovation. He was a serial entrepreneur as well as a university professor and recognized that businesses needed to be developed in order for an invention s potential to be realized. 23 In the late 1950 s, Ken Olsen, another prominent figure in Route 128 s history, founded DEC after leaving Lincoln Laboratories. This firm was the first computer technology firm to commercialize projects that had come from government research efforts. Route 128 became a mini-computer complex which developed after DEC found success in the industry. 24 By 1977, the firm had over 41% of the world s microcomputer sales. 25 3.2 c) Successes The successes, both early and more recent can be viewed by looking at the history and people involved in the area. The earlier successes were the successful shift in MIT s business model, the development of the venture capital instrument and the commercialization of the first minicomputer. Later successes were achieved through leveraging this infrastructure. Route 128 was able to successfully transition its primary industry from computer technology to biotechnology in the 80 s due to an evolution of the university model and a growing interest from the VC firms in the region. 21 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 22 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 23 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 24 Etzkowitz, H. Making Science Cities: The Triple Helix of Regional Growth and Renewal. 2005. 25 Watkins, Thayer Notes on Anna Lee Saxenian s Regional Advantage. Harvard University Press 1994. remy@bluerockinnovation.com 12
3.2 d) Framework Analysis Environmental and Structural Conditions Factor conditions Workforce - Large number of scientists, engineers and skilled technicians - Service industry employs 45.7% of Metro Boston area 26 Location - Within a train ride, drive or short flight from New England cities, NYC and Washington, DC Education - Relatively strong K-12 educational system Universities - Nationally recognized universities: MIT, Harvard, Boston University, Boston College - Greater than 100 colleges and universities in the metropolitan area R&D - Diversity of research institutions: > 10 specialized research centers (several in healthcare and biotechnology) - Both Harvard and MIT are in the top 25 schools with the largest number of patents MIT, 605 and Harvard, 164 27 - Outranks all other US cities in NIH grant awards ($1.2 billion in 2001) 28 Physical Infrastructure - Above average communications - Air transportation (Logan International Airport) and local road transportation are easily accessible. Port of Boston is one of the oldest trading centers. More than $7 billion in cargo passes through Boston annually 29 - Traffic congestion is a problem within the metro area (partially a result of the continuing Big Dig ). Road patterns can be difficult as the city is not built on a grid system. This is why Route 128 was first constructed. Quality of Life 26 http://www.massecon.com/mass.regional.gba.asp 27 Porter, M. Clusters of Innovation: Regional Foundations of US Competitiveness. 2001. 28 http://www.fdimagazine.com/news/fullstory.php/aid/1248/best_quality_of_life.html 29 http://www.massecon.com/mass.regional.gba.asp remy@bluerockinnovation.com 13
- Considered to be moderately high: The ranking on a scale of 1-10 in a resident survey dropped from 7.35 in 2001 to 7.09 in 2003. People reported feeling somewhat safe to very safe. Residents also generally feel that crime has increased. 30 The region has a rich culture, history, excellent recreational resources, and world class cultural amenities. 31 Supply of Risk Capital and VC - Risk capital and VC expertise continues to be abundant - Boston is the sight of the first VC firm Demand conditions Sophisticated and demanding buyers in core clusters Buyers often have special needs that impact final products Aging population increases demand for industry products (especially from expanding biotechnology industry) o Disadvantages Infrequent feedback from customers Context for firm strategy and rivalry Disadvantages Numerous successful start ups Several firms headquartered in region Moderate to high level of competition in selected clusters Closed system focus on IP protection and little knowledge transfer between firms (as in Silicon Valley) in the form of informal networks. Creates a competitive cluster that is more suited to slower cycle industries. Related and supporting industries Government Strength across a wide range of health care and pharmaceutical sub-clusters Supporting industry growth has expanded in the area (including VCs, instrumentation, insurance firms, etc.) 30 http://www.tbf.org/indicators2004/publicsafety/indicators.asp?id=2342&crosscutid=323&crosscutname=boston %20Neighborhoods 31 http://www.massecon.com/mass.regional.gba.asp remy@bluerockinnovation.com 14
High levels of R&D funding (ex. NIH grant awards listed previously) NIH and EPA demand for bioscience technology Strong coordination by local governments (New England Council) High technology area - over 66% of Boston households have computers 32 o Disadvantages Decreasing available housing, causing real estate costs to rise Collaborative Institutions Both formal and informal networks created to encourage business and start ups. However, there are more formal than informal. The area lacks the informal networks of Silicon Valley, due to the staunch IP protection (the open source movement has not taken hold in Boston) and more formalized business processes. o Disadvantages Attitudes Innovation is less rapid than in Silicon Valley (this may be a reason why Boston is no longer the leader in computer technology). Faster cycle industries may have a more difficult time prospering in the Boston region. Strong business oriented attitudes which stem from the development of the entrepreneurial network between the universities and industry. Entrepreneurial Characteristics Distinct And Unique Strategy Many Different Paths To Success o Developed the regional model that connected academic institutions and entrepreneurs with financing and industry players Strong Leadership, Careful Preparation, And Planning o The history above discusses the leadership from people in government, business and academia including Karl Compton and Vannevar Bush. Long-Term Commitment o Boston continued to experience the commitment of influential people. Despite some downturns, the region has continued to recover and prosper. Commitment To Develop Benefits For The Whole Community o The Boston metro area had already seen success and was on a downward economic spiral before World War II began. The leadership of the area recognized a need to 32 http://www.jointventure.org/publications/index/2005index/regionaltrends/graphs/14b.html remy@bluerockinnovation.com 15
create new business and to turn around the declining economy. Through their process of finding a solution to offset the industries leaving the area, a strong relationship between business and university systems developed, creating a new business model for the community that encourages ongoing beneficial development. Culture Compatibility Between Region & Innovation Strategy o Route 128 has a more formal and traditional business culture. Industry works closely with the universities, but information does not pass relatively freely between industry participants (as in Silicon Valley). Although this culture is not as compatible with a fast cycle industry, its interaction with academic institutions and willingness to invest in emerging industries and technologies has created a framework for innovation. Ongoing Candid And Pragmatic Evaluation & Adaptation o The leadership in the Boston area continues to evaluate and adapt to changing conditions. Early in the twentieth century, Boston area leaders initiated the formation of the New England Council to help rejuvenate the area. It continues to exist today and is active in Washington, D.C. policy regarding New England states. Activities related specifically to the Boston area also continue to help the city adapt to a changing environment. Recently, the Mayor, Thomas Menino, announced the formation of a wi-fi task force to help Boston become the world leader in wireless technology. 33 3.3 Silicon Valley 3.3 a) History Silicon Valley is a region that encompasses of sixteen cities located in Northern California. In the 1950 s the region was agricultural and produced abundant fruits and nuts. Stanford, a top university today, was in the early stages of developing into a top research institution. The US Navy and NASA had research areas located within the San Francisco Bay area. This spurred the formation of aeronautical and aerospace research firms. There were very few firms in the region that were not directly related to these government entities. The first large firm to develop that was not connected to the government bases in the area was Hewlett-Packard in 1939. This firm came about with the great assistance of Frederick Terman, a Stanford University professor (see below for additional detail). After the war, further entrepreneurial ventures formed. Engineers and researchers that either graduated from the local universities or were recruited to the area would start their own firms. Often, as the firms became bigger, the founders would be replaced with more talented managers and they would leave to start other firms. The region was relatively inexpensive to live in at the time and funding was available through a growing VC industry (developed on Sand Hill Road). The VC industry developed even further after Apple s IPO in 1980 for $1.3 billion which in turn stimulated further economic growth. 33 http://www.masshightech.com/displayarticledetail.asp?art_id=70989 remy@bluerockinnovation.com 16
Further developments of the region were closely related to the actions of the main players in the area s history. 3.3 b) Main Players Before World War II, Frederick Terman became a prominent professor at Stanford University. He was a prolific inventor and the Dean of Engineering and Provost at the university. Prior to the war, he noticed that the majority of the graduating students would leave the area and move to the east cost to find jobs (the majority headed to Boston). Teman wanted to stop the brain drain from the area and encourage the proliferation of new businesses founded by graduating students and community members. Stanford had a large area (approximately 600 acres) of land that had been donated to the university previously that could be developed for incubating start-up firms. His first step in achieving his goal was to introduce one of his graduate students (Hewlett) to a former professor (Packard) and convinced them to remain in the area and begin a venture by finding them capital and space. 34 This duo formed Hewlett-Packard and was the first firm to be incubated on the Stanford campus. During the Second World War, Terman worked in a government sponsored lab where he was the Director of the Radar Countermeasures at Harvard. While he was there, he made several contacts in the government and, after the war, was able to garner research support for Stanford and could encourage further business development through commercialization of technologies. He also had a strong network to national firms that would give him money for fellowships and encourage top students to study at the university in exchange for the intellectual property rights generated from the research (brought strong researchers to the area). Another individual who had a great impact on the region was William Shockley. He moved to Mountain View in 1956 after quitting Bell Labs and obtaining his Bachelor s degree from CalTech. He formed a start-up called Shockley Semiconductor Laboratory that was tied to Beckman Instruments. 35 He recruited talented engineers to his lab from all over the country. Due to some problems with Shockley, eight of these talented individuals, including Robert Noyce, left the firm and founded Fairchild Semiconductor in 1957. 36 This movement of engineers between firms and start-ups continued (ex. Noyce went on to leave Fairchild and start Intel, other engineers left Fairchild to start AMD, Signets and National Semiconductor as well). 3.3 c) Successes Silicon Valley s early successes were related to the development of the infrastructure and informal networks in the community. Terman s creation of the incubation space outside of the institution s research labs, his connections to financing, lawyers and technology transfer offices created opportunities to foster and develop new ventures. 34 http://www.don-iannone.com/edfutures/2003/08/origins-of-silicon-valley.html 35 www.wikipedia.com Silicon Valley. 36 www.fairchildsemi.com remy@bluerockinnovation.com 17
Silicon Valley had a later success in developing memory chips. Intel introduced the DRAM (Dynamic Random Access Memory) chip in 1970. Competition became very strong to improve the size of the memory. By 1979, Japanese firms were competing heavily in the industry. SV firm s began competing with the Japanese on cost and quality. Intel then came up with a new product that completely changed the industry the microprocessor. This led to further personal computing innovations and Silicon Valley stopped trying to compete at cost and quality. Rather their focus returned to innovation. Because of the areas openness with regards to industry information, advances in technology happened quickly. The region began to outpace Route 128 in computer technology innovations and has maintained success since the 1980 s in a fast cycle industry. 3.3 d) Framework Analysis Environmental and Structural Conditions Factor conditions Workforce - Large number of scientists, engineers and skilled technicians Location - On the northern coast of California with a temperate, humid climate. Education - Relatively strong K-12 educational system Universities - Nationally recognized universities are located in the surrounding areas of the region: UC-Berkley, Stanford University, UC-Davis, UC-Santa Cruz, etc. - Approximately 67 colleges and universities in the metropolitan area R&D - Diversity of research institutions: > 10 specialized research centers (computer technology and biotechnology) - Both Stanford and the University of California are in the top 25 schools with the largest number of patents Stanford 335 and University of California 1,585 37 Physical Infrastructure - Above average communications - Air transportation and local road transportation are easily accessible. Traffic congestion has continued to decline since 2000. 37 Porter, M. Clusters of Innovation: Regional Foundations of US Competitiveness. 2001. remy@bluerockinnovation.com 18
Quality of Life - Considered to be moderately high: Housing affordability is low. Majority of residents feel the city is safer and crime has been on a continued decline since 1992. 38 Mountains and the ocean surround the area. Supply of Risk Capital and VC - Risk capital and VC expertise continues to be abundant - Silicon Valley s VC industry has continued to prosper since after World War II Demand conditions Sophisticated and demanding buyers in core clusters Buyers often have special needs that impact final products Aging population increases demand for industry products o Disadvantages Infrequent feedback from customers Context for firm strategy and rivalry Numerous successful start ups Several Fortune 500 firms headquartered in region Moderate to high level of competition in selected clusters Related and supporting industries Government Supporting industry growth has expanded in the area including clusters of VC firms and technical training schools High levels of R&D funding o Disadvantages The Valley is fifth in connectivity as a percentage of households (61%) with computers. 39 Housing and real estate in general has become very expensive and this is not conducive to the continued proliferation of entrepreneurial start-ups. 38 http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/04/22/bag1ncd82o1.dtl 39 http://www.jointventure.org/publications/index/2005index/regionaltrends/graphs/14b.html remy@bluerockinnovation.com 19
Collaborative Institutions Both formal and informal networks exist and have encouraged business and startups. Early in the area s development a culture of openness developed. Technical people would move between businesses starting up new firms and then leaving them once they became established. Informal networks have proliferated and allowed for more collaboration and innovation to occur at a very fast pace. This is a critical competency for the community when the main industry of the area is competing in a hyper-competitive global marketplace. Attitudes Strong business oriented attitudes which stem from the development of the entrepreneurial network between the universities and industry. Entrepreneurial Characteristics Distinct And Unique Strategy Many Different Paths To Success o The area developed through the networks of a few individuals. By leveraging networks the area has been able to adjust to changing competitive conditions and find success through radical innovation. Strong Leadership, Careful Preparation, And Planning o The history above discusses the leadership from people in government, business and academia including Professor Terman and Stanford University. Long-Term Commitment o The area began its development before WWII and has seen some fluctuations in its success. It has however, throughout this evolution, continued to innovate and support entrepreneurship. Commitment To Develop Benefits For The Whole Community o The impetus for Silicon Valley stemmed from a professor s concern that the graduating students were all migrating to the northeast, creating a brain drain in the area. In order to encourage them to stay and settle in the community, an environment that fostered entrepreneurship had to be developed. The focus was on leveraging the resources of Stanford University and its access to research funding to improve the community (and in return improve the reputation of the university). Culture Compatibility Between Region & Innovation Strategy o Silicon Valley has a business friendly culture that encourages the transfer of information between universities and business. Not only is the information transferred, but so are the people. They migrate from academia to business, business to academia and business to business. The less guarded culture of the region has encouraged more collaboration that has resulted in rapid innovation. remy@bluerockinnovation.com 20
Ongoing Candid And Pragmatic Evaluation & Adaptation o The leadership in Silicon Valley continues to evaluate and adapt to changing conditions. The region seems to be acutely aware of its position and wants to maintain this. Leadership in the region is most currently concerned with the rising cost of living and the affect this will have on its culture of start-ups and innovation. An online network that critiques the current state of the area is updated regularly. It states that VC funding is on the rise as well as productivity and R&D funding. However, the rising costs of housing mentioned above may affect the foundation of young talent, teachers and service professionals from remaining or coming to the area. 40 4. Conclusion All of the three regions analyzed are recognized entrepreneurial hot spots and the table below clearly supports their well earned reputation. In just about every category from Factor Conditions to Culture these entrepreneurial hot spots excel. Of the three hot spots analyzed in this paper, Silicon Valley scored the highest, as there were no apparent weaknesses. Both Boston and the Research Triangle have areas where they still have issues; however these issues pale in comparison to the areas they excel in. The Research Triangle is known for its collaborative research, Silicon Valley for its strong VC community and Boston for its formal networks. Each region has also developed clusters which help to drive the entrepreneurial growth the Research triangle has strong Bio-Pharmaceutical clusters; Silicon Valley has strong hi tech clusters and Boston has strong biotech clusters. One of the characteristics which all three regions excelled in was the degree to which networks and collaboration drive growth. In Silicon Valley, entrepreneurs are nurtured by the networks so that one day they can become major players. The Research Triangle has numerous organizations in place to assist would be entrepreneurs. Boston s universities and VCs are supportive of new ventures and new entrepreneurs. In addition, all three regions have multiple universities interacting with business and government to further encourage entrepreneurship. What can be learned from this analysis is that there are many factors which contribute a region s entrepreneurial growth potential; however in all cases it takes leadership from academia, business and government to recognize the need for developing a region s innovative capacity and then an ability to work together to develop the foundation for entrepreneurship. 40 http://www.jointventure.org/publications/index/2005index/2005index/about.html remy@bluerockinnovation.com 21
Table 1 Entrepreneurial Growth Potential Structural and Environmental Interactions Entre Growth Characteristics Research Triangle (North Carolina) Factor Conditions + [Workforce, location, universities, R&D, Quality of Life] Demand Conditions Context for Firm Strategy and Rivalry Related and Supportive Industries Government Collaborative Institutions Attitudes toward Business Distinct and Unique Strategy Silicon Valley (California) + [Workforce, location, education, capital, universities, quality of life...] Boston (Massachusetts) + [Workforce, location, education, capital, universities, quality of life...] + + + O [Low level competition] O [Limited breadth in key clusters] O [High levels of R&D funding, poor coordination among local governments] + [Strong formal and informal networks] + [numerous start ups, many fortune 500 firms] O [Industry is more closed to informal networks less rapid innovation] + + + + + [Strong formal and informal networks] O [More formal than informal networks] + + + + [Increase collaborative research] Strong Leadership + [Strong government, academia and business leadership] Long Term Commitment + [Began in 1954 and took 20 years before becoming established] + + + + + + remy@bluerockinnovation.com 22
Commitment to Community + [Strong concern and focus on the community] Culture + [Strong culture of exchange between academia and business] Evaluation & Adaptation + [Constantly evaluation and strategizing taking place] + + + + + + remy@bluerockinnovation.com 23