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.
———-

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.
Listen to the post here: Download the Podcast here

30 Responses

  1. This is great. I like the extension of trial-and-error from the engineering/research lab into the world of general business.

    I would argue, however, that in the 2000s and up, the influence of this model has become so pervasive that many MBAs (not all schools, and not all graduates) have learned the value of entrepreneurship, and many actually add value to entrepreneurial ventures. Like with engineers, you need to vet carefully (hardly all engineers are creative and innovative), but the talent pool that is both innovative and educated in the ins and outs of *business* is there and growing.

    Wrote about it (referencing you, of course) at http://blog.atomicinc.com/2011/07/25/which-type-of-people-are-really-innovative/

    But… I admit personal bias; after all I have an engineering degree and an MBA. But I have always considered myself an engineer at heart, first and foremost.

  2. I earned my engineering degree in 1989. Since then, I’ve spent most of my career in business and finance, and a day doesn’t go by when I don’t use some skill I can trace to my engineering roots.

    Engineers are problem solvers. Most engineers stick to solving problems within a fairly narrow discipline, but a few break out and apply their skills to other spheres: persuading customers, leading teams, organizing finances, and the like.

    It doesn’t work quite as well in reverse: it’s rare that you can apply sales or marketing or finance skills to solve a technical product problem.

    That could explain, in part, why technical founders are disproportionately represented among Silicon Valley success stories.

  3. You have a point, but I think you’re missing the main aspect.

    See, my perception is that ‘geek founded companies’ work when their target audience are geeks!

    Who uses Fairchild products? The engineers that build products. Except for Intel, it’s difficult to pitch to the avg. consumer “this product has Infineon chips” for example.

    Genentech, same thing. Their customers are labs, pharmaceutical companies, etc, etc.

  4. Always a pleasure getting a history refresher on this subject from your blog Steve. Thanks for covering the broad history of silicon valley in a concise and focused manner.

  5. Steve,

    Yes, waiting for:

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

    “Stay tuned for the next post.”

    I would make two points:

    First, in your

    “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.”

    For a researcher, in science or engineering, there are more alternatives than just “applied experimentation” and “pure research”!

    Instead, there is the somewhat traditional approach: (1) See a big problem where there is little doubt a good solution would be valuable. (2) Using what is known in science and engineering and maybe some original work, get a good solution. (3) Start a business to deliver the solution and harvest the value.

    Step (2) doesn’t have to be a lot of “applied experimentation”, “iteration”, guessing, trial and error, floundering around, throw it against the wall to see if it sticks, etc. Instead, the work can be a few hours, days, or weeks where the researcher has their feet up, a sharp pencil, a big eraser, a pad of blank paper, and thinks of and writes out the solution. The work can be much like solving a relatively difficult exercise in an advanced course with a lot of applied math. Especially important with the state of computing now, the research can be all just paper and pencil research to get the solution followed by software ready for production. DoD problems have long been awash in such work.

    Second, the “learning, discovery, iteration and execution” of such research is not the same as the ‘pivoting’ in the “search for a scalable and repeatable business model”. Instead, the business model can be stable: Deliver the solution to the big problem. That stable business model can start executing as soon as the solution is available from the research.

    Since the research will likely be done before anyone in finance has heard of the work, for the finance people there is no more searching and, instead, just executing to deliver the good solution, obtained from the research, for the big problem.

  6. great post – I have a science background myself and it’s interesting to read about the history of sillicon valley and the role of engineers in the ecosystem…

    however, the dark side to the current startup environment in the bay area is that 99% of the attention and money is focused these days on web startups, and no longer on semiconductors, or more advanced hardware or software (perhaps “old school”) technologies.

    IMHO this is a sad state of affairs and quite a few startups with great technology might simply die because investors are looking for quick returns and easy to understand technology … ?

  7. Fascinating post. This resonates very strongly with my experience. I have traveled through all these paths – got my first degree in engineering, later did a PhD, worked as a researcher for a while, got an MBA and then became a tech entrepreneur. Lately I have come to the conclusion that I still think and behave like an engineer, even with all those other influences.
    The shift of the VC community from relying on engineers to relying on MBAs may be related to an increased tendency of VCs over the last couple decades to grow a company for the sole purpose of selling it (and quickly), as opposed to learning/building it for the long run. Engineers generally like things that work well (for their intended use/user) and things that last, and dislike taking too big a leap without concrete data. (Sounds a lot like Customer Development, no?)
    Maybe Steve is sensing a shift back to those roots, which would be very welcome. My conversations with VCs lately make me a bit skeptical, but one can always hope.

    • I think part of it is that so many VCs are purely bankers. Yes, the relationship element is important, and knowledge of finance is important, but putting on the Board of a company, especially a startup, someone with zero technology or operational experience is asking for trouble.

      Quite simply, many of these guys don’t get the business, just want to make money off of it, and so hire people they understand.

  8. If an engineer can understand how to build the right customer/partner relationships in addition to building the right product then yes I agree. Problem is most engineers are so product centric (which is a good thing) they forget to think about things like profitability, instead they think about what a cool application they’re developing, it’s the business person (or MBA or VC or whatever) that needs to make sure this is a part of the startup formula. I agree with JamesP.

  9. Great post. I would love to see a new movement at universities following models such as this!

  10. [...] Conventional wisdom is that, generally speaking, geek CEOs are a Bad Idea. Serial entrepreneur and entrepreneurship educator extraordinaire Steve Blank disagrees… How Scientists and Engineers Got It Right, and VC’s Got It Wrong [...]

  11. [...] Blank published an interesting blog post with an historical review of  some companies in Silicon Valley that were founded by scientists and [...]

  12. In the mid-1980’s I used to work for NAVELEX San Diego and would travel to ESL for meetings and testing of the AN/SYQ-8 Caliper Signal Analysis system. Incredible what could be done with an ancient AN/UYK-20 core memory computer! Lots of smart people there.

  13. I vaguely remember ESL from the 1980s, but I was only aware of the role scientist and engineers from DOD programs played in Silicon Valley as we know it today from your talk “The Secret History of Silicon Valley”. Silicon Valley was the tip of the iceberg of smart people in DOD Intelligence community. I don’t think we will ever see the kind of marshaling of talent in a single cause again.

    Any attempt to develop scientist and engineering into entrepreneurs is needed now more than ever. All the hype of VC backed consumer product startup is not we need to drive the economy back to life.

  14. I have to disagree: I’ve worked with several engineers on a startup I founded and they wanted to cross over into pretty much everything but were plainly bad at it.
    I found they had this sort of arrogance where they declared they could handle everything and be better than everyone else at it. It was tiresome. When one of them pushed me over and over again to write a communication plan for our project (that had not even incorporated), i understood it was time to get rid of him.

    Yes, you guys are good at stuff. But not at everything, so don’t go teaching other people their own specialities and respect their expertise.

  15. Steve:

    I was fascinated by your “lean startup” idea (originally from Eric Ries I believe but you have been preaching it and implementing it to your class) but I have to say I was disappointed by this post. The real issue is that entrepreneurs do not pit one particular thing or group of people against others. They leave all options open. In looking back at the history, it is better to give due credits to different groups of people, which is the only way to connect dots and get the whole pictures. Titles like yours may catch eyeballs and good for search engine optimization but provide dis-utilities or dis-services to the community.

    • I see nothing in the title that pits one group against another. You are seeing something that doesn’t exist. It’s a simple title that I assume means that Scientist and Engineers didn’t get the funding or respect for the startups they were founding in the early days of Silicon Valley. From everything I’ve read from Steve he has never pit one group against another and if you had read any of his previous writings you would know that to be true.

  16. [...] via How Scientists and Engineers Got It Right, and VC’s Got It Wrong « Steve Blank. [...]

  17. [...] 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 [...]

  18. [...] Education: Both degrees will teach you something. The MBA focuses on case studies and financial concepts (e.g. accounting). A PhD emphasises independent systematic research and domain knowledge (e.g. electronics). The latter is simply more valuable for a tech entrepreneur. Steve Blank is right that most of the great entrepreneurs were Scientists and Engineers, not MBAs. [...]

  19. I like this so much I pushed it from my blog. http://h-et-h.org/blog/2011/08/01/how-vcs-kill-companies – I admit my headline is bit more provocative :-)

    I can’t claim as many startups (yet!) but the points here are spot on. We keep the VCs out as long as possible, bootstrapping is tough but it preserves our freedom to innovate the model until we know we are shooting at the center of the right target. Innovation isn’t nice and rational, and you can’t schedule a breakthrough – no matter how much you want to, some milestones are reached only when the right talent has the right insights.

  20. Scientists and engineers ARE the best source of real deals..and real innovations..and real sustainable companies…and realizations to global challenges. For too long the MBA-hero and innovation disembodied from the innovator have been the fad especially in arenas outside of IT.

    Here’s my take on it from X-conomy..

    http://www.xconomy.com/boston/2011/05/18/innovation-as-king-is-dead-the-day-of-the-innovator-has-arrived/

  21. [...] Steve Blank, lecturer, Haas School of Business | 8/2/11 | Leave a comment 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 [...]

  22. The role of engineers and scientists in entrepreneurship has definitely been down-played in the past few decades. Some tend to just overlook their business acumen, and only think of their innovations.

  23. [...] 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 [...]

  24. [...] full article….via How Scientists and Engineers Got It Right, and VC’s Got It Wrong « Steve Blank. Share OptionsPrintTwitterEmailMoreFacebookLinkedInStumbleUponRedditDiggLike this:LikeBe the first [...]

  25. Steve
    I found out about you through Google Alerts, this article should be required reading. I read in another of your articles on hiring that you are a visual learner, so are most people. I have been using rich media to accelerate commercialization,while it has shown great results, innovators would rather spend $10,000 on a business plan than media to demonstrate their technology.
    Can you explain the mindset, is it that people do not understand the power and reach of media?

    • Peter,
      It’s because most investors aren’t investing in a video with talking heads, or videos that feel like corporate ads.
      On the other hand, short snippets of video created inexpensively to illustrate a complex technical idea would be helpful.

      steve

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