Eureka! A New Era for Scientists and Engineers

Silicon Valley was born in an era of applied experimentation driven by scientists and engineers. It wasn’t pure research, but rather a culture of taking sufficient risks to get products to market through learning, discovery, iteration and execution. This approach would shape Silicon Valley’s entrepreneurial ethos: In startups, failure was treated as experience (until you ran out of money).

The combination of Venture Capital and technology entrepreneurship is one of the great business inventions of the last 50 years. It provides private funds for untested and unproven technology and entrepreneurs. While most of these investments fail, the returns for the ones that win are so great they make up for the failures. The cultural tolerance for failure and experimentation, and a financial structure which balanced risk, return and obscene returns, allowed this system flourish in technology clusters in United States, particularly in Silicon Valley.

Yet this system isn’t perfect. From the point of view of scientists and engineers in a university lab, too often entrepreneurship in all its VC-driven glory – income statements, balance sheets, business plans, revenue models, 5-year forecasts, etc. – seems like another planet. There didn’t seem to be much in common between the Scientific Method and starting a company. And this has been a barrier to commercializing the best of our science research.

Until today.

Today, the National Science Foundation (NSF) – the $6.8-billion U.S. government agency that supports research in all the non-medical fields of science and engineering – is changing the startup landscape for scientists and engineers. The NSF has announced the Innovation Corps – a program to take the most promising research projects in American university laboratories and turn them into startups. It will train them with a process that embraces experimentation, learning, and discovery.

The NSF will fund 100 science and engineering research projects every year. Each team accepted into the program will receive $50,000.

To commercialize these university innovations NSF will be putting the Innovation Corps (I-Corps) teams through a class that teaches scientists and engineers to treat starting a company as another research project that can be solved by an iterative process of hypotheses testing and experimentation. The class will be a version of the Lean LaunchPad class we developed in the Stanford Technology Ventures Program, (the entrepreneurship center at Stanford’s School of Engineering).

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This is a big deal. Not just for scientists and engineers, not just for every science university in the U.S., but in the way we think about bringing discoveries ripe for innovation out of the university lab. If this program works it will change how we connect basic research to the business world. And it will lead to more startups and job creation.

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Introducing the Innovation-Corps
The NSF Innovation-Corps program (I-Corps) is designed to help bridge the gap between the many scientists and engineers with innovative research and technologies, but little knowledge of the first steps to take in starting a company.

I-Corps will help scientists take the first steps from the research lab to commercialization.

Over a period of six months, each I-Corps team, guided by experienced mentors (entrepreneurs and VC’s) will build their product and get out of their labs (and comfort zone) to discover who are their potential customers, and how those customers might best use the new technology/invention. They’ll explore the best way to deliver the product to customers, the resources required, as well as competing technologies.  They will answer the question, “What value will this innovation add to the marketplace? And they’ll do this using the business model / customer development / agile development solution stack.

At the end of the program each team will understand what it will takes to turn their research into a commercial success. They may decide to license their intellectual property based on their research. Or they may decide to cross the Rubicon and try to get funded as a startup (with strategic partners, investors, or NSF programs for small businesses). At the end of the class there will be a Demo Day when investors get to see the best this country’s researchers have to offer.

What Took You So Long
A first reaction to the NSF I-Corps program might be, “You mean we haven’t already been doing this?”  But on reflection it’s clear why.  The common wisdom was that for scientists and engineers to succeed in the entrepreneurial world you’d have to teach them all about business. But it’s only now that we realize that’s wrong.  The insight the NSF had is that we just need to teach scientists and engineers to treat business models as another research project that can be solved with learning, discovery and experimentation.

And Stanford’s Lean LaunchPad class could do just that.

Join the I-Corps
Today at 2pm the National Science Foundation is publishing the application for admission (what they call the “solicitation for proposals”) to the program. See the NSF web page here.

The syllabus for NSF I-Corps version of the Lean LaunchPad class can be seen here.

Along with a great teaching team at Stanford, world-class VC’s who get it, and foundation partners, I’m proud to be a part of it.

This is a potential game changer for science and innovation in the United States.

Join us.

Apply now.
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How Scientists and Engineers Got It Right, and VC’s Got It Wrong

Scientists and engineers as founders and startup CEOs is one of the least celebrated contributions of Silicon Valley.

It might be its most important.
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ESL, the first company I worked for in Silicon Valley, was founded by a PhD in Math and six other scientists and engineers. Since it was my first job, I just took for granted that scientists and engineers started and ran companies.  It took me a long time to realize that this was one of Silicon Valley’s best contributions to innovation.

Cold War Spin Outs
In the 1950’s the groundwork for a culture and environment of entrepreneurship were taking shape on the east and west coasts of the United States. Each region had two of the finest research universities in the United States, Stanford and MIT, which were building on the technology breakthroughs of World War II and graduating a generation of engineers into a consumer and cold war economy that seemed limitless. Each region already had the beginnings of a high-tech culture, Boston with Raytheon, Silicon Valley with Hewlett Packard.

However, the majority of engineers graduating from these schools went to work in existing companies.  But in the mid 1950’s the culture around these two universities began to change.

Stanford – 1950’s Innovation
At Stanford, Dean of Engineering/Provost Fred Terman wanted companies outside of the university to take Stanford’s prototype microwave tubes and electronic intelligence systems and build production volumes for the military. While existing companies took some of the business, often it was a graduate student or professor who started a new company. The motivation in the mid 1950’s for these new startups was a crisis – we were in the midst of the cold war, and the United States military and intelligence agencies were rearming as fast as they could.

Why It’s “Silicon” Valley
In 1956 entrepreneurship as we know it would change forever.  At the time it didn’t appear earthshaking or momentous. Shockley Semiconductor Laboratory, the first semiconductor company in the valley, set up shop in Mountain View. Fifteen months later eight of Shockley’s employees (three physicists, an electrical engineer, an industrial engineer, a mechanical engineer, a metallurgist and a physical chemist) founded Fairchild Semiconductor.  (Every chip company in Silicon Valley can trace their lineage from Fairchild.)

The history of Fairchild was one of applied experimentation. It wasn’t pure research, but rather a culture of taking sufficient risks to get to market. It was learning, discovery, iteration and execution.  The goal was commercial products, but as scientists and engineers the company’s founders realized that at times the cost of experimentation was failure. And just as they don’t punish failure in a research lab, they didn’t fire scientists whose experiments didn’t work. Instead the company built a culture where when you hit a wall, you backed up and tried a different path. (In 21st century parlance we say that innovation in the early semiconductor business was all about “pivoting” while aiming for salable products.)

The Fairchild approach would shape Silicon Valley’s entrepreneurial ethos: In startups, failure was treated as experience (until you ran out of money.)

Scientists and Engineers as Founders
In the late 1950’s Silicon Valley’s first three IPO’s were companies that were founded and run by scientists and engineers: Varian (founded by Stanford engineering professors and graduate students,) Hewlett Packard (founded by two Stanford engineering graduate students) and Ampex (founded by a mechanical/electrical engineer.) While this signaled that investments in technology companies could be very lucrative, both Shockley and Fairchild could only be funded through corporate partners – there was no venture capital industry. But by the early 1960′s the tidal wave of semiconductor startup spinouts from Fairchild would find a valley with a growing number of U.S. government backed venture firms and limited partnerships.

A wave of innovation was about to meet a pile of risk capital.

For the next two decades venture capital invested in things that ran on electrons: hardware, software and silicon. Yet the companies were anomalies in the big picture in the U.S. – there were almost no MBA’s. In 1960’s and ‘70’s few MBA’s would give up a lucrative career in management, finance or Wall Street to join a bunch of technical lunatics. So the engineers taught themselves how to become marketers, sales people and CEO’s. And the venture capital community became comfortable in funding them.

Medical Researchers Get Entrepreneurial
In the 60’s and 70’s, while engineers were founding companies, medical researchers and academics were skeptical about the blurring of the lines between academia and commerce. This all changed in 1980 with the Genentech IPO.

In 1973, two scientists, Stanley Cohen at Stanford and Herbert Boyer at UCSF, discovered recombinant DNA, and Boyer went on to found Genentech. In 1980 Genentech became the first IPO of a venture funded biotech company. The fact that serious money could be made in companies investing in life sciences wasn’t lost on other researchers and the venture capital community.

Over the next decade, medical graduate students saw their professors start companies, other professors saw their peers and entrepreneurial colleagues start companies, and VC’s started calling on academics and researchers and speaking their language.

Scientists and Engineers = Innovation and Entrepreneurship
Yet when venture capital got involved they brought all the processes to administer existing companies they learned in business school – how to write a business plan, accounting, organizational behavior, managerial skills, marketing, operations, etc. This set up a conflict with the learning, discovery and experimentation style of the original valley founders.

Yet because of the Golden Rule, the VC’s got to set how startups were built and managed (those who have the gold set the rules.)

Fifty years later we now know the engineers were right. Business plans are fine for large companies where there is an existing market, product and customers, but in a startup all of these elements are unknown and the process of discovering them is filled with rapidly changing assumptions.

Startups are not smaller versions of large companies. Large companies execute known business models. In the real world a startup is about the search for a business model or more accurately, startups are a temporary organization designed to search for a scalable and repeatable business model.

Yet for the last 40 years, while technical founders knew that no business plan survived first contact with customers, they lacked a management tool set for learning, discovery and experimentation.

Earlier this year we developed a class in the Stanford Technology Ventures Program, (the entrepreneurship center at Stanford’s School of Engineering), to provide scientists and engineers just those tools – how to think about all the parts of building a business, not just the product. The Stanford class introduced the first management tools for entrepreneurs built around the business model / customer development / agile development solution stack. (You can read about the class here.)

So what?

Starting this Thursday, scientists and engineers across the United States will once again set the rules.

Stay tuned for the next post.
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The $10 million Photo and other VC Stories

While on vacation I had a phone interview with Kevin Ohannessian of Fast Company who wanted a few “funding stories.”  Here are two of them. Apologies for the rambling stream of consciousness.  The original interview in Fast Company can be seen here.

Throw in the Photo and You Have a Deal
When we were trying to raise money for E.piphany, my last startup, I was negotiating with a venture capital firm called Infinity Capital. They really wanted to invest, but it was the beginning of the bubble, and I wanted (what was then) an absurd valuation. All we had were six slides, and I wanted a $10 million post-money valuation. But it was my eighth startup and my partner Ben was even more experienced: ex VC, ex Harvard Computer Science professor, genius at building products and teams. I had sat on a board of an Electronic Design Automation company with this VC, and we had gotten to know each other. So when I wanted to start a company he wanted to fund us. We had gone back and forth with them on valuation, but this was a new firm and they wanted to close a deal with us.

After about our fifth meeting I’m in their conference room. I say, “Why can’t you guys do a $10 million post money valuation?” Picking the biggest number I could think of for three founders without a product a semi-coherent idea and badly written slides. Finally they admitted, “Steve, we’re a new fund; everybody will think we are idiots if we do that.” I said, “All right. Can you do some other number close to my number?” So I stepped out of the room as they caucused, and they called me back in 10 minutes later and said, “So listen. We can do $9.99 million.” I’m trying to play poker with the deal, and one of the partners at the time was a great photographer–the firm had big prints of his on the walls. I was really in love with the one in the boardroom. So without thinking, when they made me that offer, trying to keep a straight face, I reached behind me, grabbed the photo off the wall and slammed it on the desk, and said, “If you throw this photo in, you got the deal!”

The $10 Million Photo

The look on their face was utter astonishment. I was thinking it was because I was being creative by throwing the photo in, but then I noticed that this cloud of dust was settling around me. I turn around and looked at the wall and it turned out the photo had been bolted into the drywall. And there was now a hole–I literally ripped a part of their boardroom wall off as I was accepting the offer. Without missing a beat they said, “Yes, you can have the photo. But we’re going to have to deduct $500 to repair our wall.” And I said, “Deal.” And that’s how E.piphany got its Series A.

Invest in the Team
Before we closed our Series A with Infinity, I had called on Mohr, Davidow Ventures, the firm which had funded my last company, Rocket Science. The senior partner at the time was Bill Davidow, a marketing legend and a hero of mine who had also funded other Enterprise software companies. I went in and pitched Bill the idea about how to automate the marketing domain. He gave me 15 minutes, then as politely as he could do it, walked me out the door and said, “Stupidest idea I ever heard, Steve. Enterprise software means across the Enterprise. Marketing is just one very small department.” As he was walking me out, I remember as I physically crossed the threshold of the door that: A. He was right, and B. I figured out how to solve the problem of making our product useful across the entire enterprise. So E.piphany went from a bad idea to a good idea by being thrown out by a VC who gave me advice that made the company. He has reminded me since, “Sometimes you invest in the idea, but you should always be investing in the people. If I would’ve remembered who you were, I would’ve known you would figure it out.”

(Kleiner Perkins would do the Series B round for E.piphany. After our IPO Infinity’s and Kleiner Perkins’ investment in Epiphany would be worth $1 billion dollars to each of them.)

I still have the photo.

Back from vacation soon.
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On Vacation

Exploring Spain.  Back soon.

 

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