After a decade of VC influence at Stanford, what’s next?
Author: Abbey Goldberg
Editor’s Note: This piece was written in partnership with the Stanford Tech History Project, which seeks to document how Stanford’s tech ecosystem has changed since 2010. The full report will be published on Monday, April 26th. click here.
This portion of the Tech History Project aims to document how Stanford’s ties with venture capital have changed over the past decade, as well as make recommendations for improving them going forward.
Interestingly, and more broadly, this section aims to write a history of something whose main thrust is oriented toward the future.
Venture capitalists are a primary source of vigor for the entrepreneurial ecosystem of Silicon Valley, and venture capital as an asset class largely punches above its weight. Since 1974, over 40% of U.S. company IPOs have been venture-backed, and over the past three decades venture capital has become a dominant force in the financing of American companies like Apple, Google, and Microsoft. In fact, venture capital has generated more economic and employment growth in the United States than any other investment sector; annually, venture investment makes up only about 0.2% of GDP, but delivers more than 20% of U.S. GDP in the form of VC-backed business revenues.
A primer on venture capital
“By financing startups, venture capitalists accumulate entrepreneurial knowledge. They are the memory of the complex network of the Silicon Valley.”
— Michel Ferrary and Mark Granovetter, authors of The Role of Venture Capital Firms in Silicon Valley’s Complex Innovation Network
Before going further, it will be beneficial to provide a working definition of venture capital and take a preliminary look at the activities of venture capitalists. The abbreviation “VC” may be used to refer to both the venture capital industry as a whole, as well as an individual venture capitalist.
A VC has five main characteristics, according to a seminal book on the topic:
A VC is a financial intermediary, taking capital from investors (or “limited partners”) and investing it directly into early-stage companies.
A VC invests in private companies.
A VC takes an active role in helping the companies in its portfolio.
A VC’s primary goal is to maximize its financial return by exiting investments, either through a sale or an initial public offering (IPO).
A VC invests to fund the internal growth of companies.
Andrew Merrick and Ayako Yasuda, 2010. Venture Capital and the Finance of Innovation.Another definition that will be helpful here is that of an angel investor. Angel investors are similar to VCs in some ways, but different primarily in the fact that angels use their own capital (thus not satisfying characteristic (1) outlined above). Venture capital in Silicon Valley
Why Silicon Valley?
Silicon Valley is characterized by high clustering density, where “ethnic ties, university ties, friendship ties, past professional ties and current professional ties are intertwined” to sustain innovation and entrepreneurship.
Historically, Silicon Valley is characterized by a meteoric rate of startup creation — Hewlett Packard, Intel, Oracle, PayPal, Instagram, and Google (just to name a few) were all founded in Silicon Valley. A majority of the aforementioned companies were created by Stanford students or alumni.
Perhaps one of the biggest factors here is Stanford’s proximity to Sand Hill Road, a 5.6-mile arterial road in Silicon Valley notable for its concentration of venture capital firms. Considered the “Wall Street of the West Coast,” Sand Hill Road has been the connector between ambitious founders and funding partners for decades.
Some of the venture funds on Sand Hill Road (Bloomberg).Venture capital firms play a prominent role in Silicon Valley’s complex innovation landscape. In particular, these venture funds participate in a reflexive interchange of startup and VC knowledge, one that has enabled Stanford University and the broader Silicon Valley ecosystem to both benefit mutualistically from one another. The following sections will go into more detail on the roles that these players both contribute to the ecosystem.
“These institutions continue to provide a diverse and highly talented executive and technical workforce. But they do more than teach students… It’s a mistake to see this traffic in knowledge as a one-way street. These excellent schools feed the firms of the Valley… But as I note below, the firms in the Valley also help feed the excellence of the schools” —
Martin Kenney, author of Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region
Venture capital within Stanford’s ecosystem
Given its central role in Silicon Valley, Stanford has been one of the most successful universities in the world for creating companies and attracting funding. Unsurprisingly, the past decade’s fundraising data is consistent with this trend. More often than not, Stanford has been at the top of the list of universities producing the most VC-backed entrepreneurs, and during this period, there has been a substantial increase in funding received by Stanford-affiliated startups.
“Venture capitalists routinely back more founders coming out of the Stanford business program than any other university in the country.”
Compiling raw data from several PitchBook university reports, we found that in the first half of the decade (January 2010 to July 2015), Stanford produced 955 company founders, who created 813 companies and raised $10 billion. By contrast, in the second half of the decade (August 2016 to September 2020), there were 798 new founders and 741 new companies, with the total funding reaching $54.1 billion, a 540% increase from the amount raised in the decade’s first half (Source 1, 2, 3, 4, 5).
(NOTE: PitchBook was much more poorly populated in the earliest years of the past decade, and the extraordinary increase in venture capital funding is partly attributable to the availability of better data metrics (not necessarily a real increase). We employed the statistical technique “difference in differences” to assess whether the unusual surge in funding was seen in other universities as well, and the results confirmed our suspicion: Harvard had a 704% increase, MIT had 262%, and UPenn had 408%. As such, it’s likely that Stanford’s increase was overstated, and it would be misleading to present these results without this caveat. Because very few companies release reports on university entrepreneurship, PitchBook’s reports are still the most comprehensive and widely cited. As such, we decided to include this data in our report, and we believe it does capture the overall direction of movement around VC funding.)
Funding raised by Stanford founders in the last decade, according to PitchBook. Please do not interpret this data without reading the important caveat noted above.While Stanford topped the rankings of undergraduate programs producing most entrepreneurs, in the graduate programs list, Harvard Business School remained ahead of Stanford Graduate School of Business throughout the decade. One explanation for the business school gap could be the bigger size of Harvard’s MBA classes, which is almost 2.5 times that of GSB’s. The remarkable rise in funding for Stanford startups has been fueled by a combination of catalysts, including both macro trends and Stanford-specific advantages. We discuss some of the Stanford-specific advantages — like classes, clubs, and scout programs — later in this section, but two industry-wide macro trends include:
The advent of the Web 2.0 revolution, as articulated in Marc Andreessen’s prescient op-ed “Software is eating the world.” In the past decade, software-based solutions supplanted products and services traditionally delivered through other means. Stanford students and alumni were at the forefront of this disruption, founding startups like SoFi, StubHub, Robinhood, and Instagram.
An unparalleled rise in global venture capital financing, coinciding with a drop in the number of funded startups.
Invested capital, compared with number of deals, over the last decade globallyOf course, Stanford also has a variety of its own specific advantages that help to explain the impressive rise in funding for Stanford startups over the past few decades. As Contrary Capital put in its inaugural university rankings:
“If you’re a university entrepreneur, it’s tough to beat Stanford. It has it all: perhaps the best strategic location out of any university with Sand Hill Road on its doorstep, top-tier programs in nearly every field, and a decades-long entrepreneurial culture. Underappreciated in impact is Stanford’s leave of absence policy — students can leave for a full year without consequence. This dovetails well with their flexible curricula. Pairing access to high-quality resources with the freedom to work on anything predictably spawns interesting companies every year.”
In addition, some particular aspects that also play a role include Stanford’s classes, organizations, campus accelerators, student-run venture funds, and venture capital scout programs. We go into more detail in the sections below.
Classes
“[Stanford’s] campus, in fact, seems designed to nurture such success. The founder of Sierra Ventures, Peter C. Wendell, has been teaching Entrepreneurship and Venture Capital part time at the business school for twenty-one years, and he invites sixteen venture capitalists to visit and work with his students. Eric Schmidt, the chairman of Google, joins him for a third of the classes, and Raymond Nasr, a prominent communications and public-relations executive in the Valley, attends them all. Scott Cook, who co-founded Intuit, drops by to talk to Wendell’s class. After class, faculty, students, and guests often pick up lattes at Starbucks or cafeteria snacks and make their way to outdoor tables.”
— Ken Auletta, The New Yorker (2012)
The past decade has seen a major influx of venture capital and startup-related courses on Stanford’s campus.
Lean Launchpad, one of Stanford’s flagship entrepreneurship classes, was founded in 2010. (This class is discussed in more detail in the External Relationships section of this report.) Not long thereafter came CS 183 (aptly named “Startup”) taught by venture capitalist Peter Thiel ’89 JD ’92. Shortly after that came Startup Garage in 2013, and Sam Altman’s “How to Start a Startup” in 2014. Other popular classes from the last decade include Technology-Enabled Blitzscaling with Reid Hoffman ’90; Entrepreneurship and Venture Capital with