Innovation: Boston's Route 128 and San Francisco's Silicon Valley

Both the Route 128 area outside Boston and the Silicon Valley outside San Francisco provide excellent examples of innovation hotbeds, which benefit from local research universities of international reputation and a thriving start-up culture with R&D office parks.

Silicon Valley

Stanford's then-dean of the School of Engineering and MIT graduate Frederick Terman (1900-1982) played a key role in the development of the Silicon Valley, along with William Shockley (1910-1989), who received the Nobel Prize in Physics in 1956 for co-inventing the transistor.

Terman led the creation of Stanford Industrial Park in 1951 (now renamed Stanford Research Park), supposedly the world's first technology-oriented office park, with tenants such as Hewlett-Packard, General Electric, Lockheed Corporation and Eastman Kodak. Terman was also Stanford's Provost from 1955 to 1965, overseeing the expansion of science and engineering departments, which cemented Stanford's reputation as a leading university in high tech. He is also a founding member of the National Academy of Engineering.

Shockley, who invented the junction transistor in 1951, directed the Shockley Semiconductor Lab at the Beckman Instruments company in Mountain View, CA starting in 1955. He is alleged to have had an abrasive management style, which led 8 of his employees to resign in 1957 and started Fairchild Semiconductor instead. One of the eight was Gordon Moore, who would later found Intel. Other companies later created by some of those eight employees include Molectro, later acquired by National Semiconductor (which recently became part of Texas Instruments) and Advanced Micro Devices (AMD), Intel's rival.

Interestingly, Fairchild Semiconductor is viewed as the first venture-backed startup, receiving investment in 1959 by what would become Venrock Associates ten years later. This came shortly after the passage of the Small Business Investment Act of 1958, which created Small Business Investment Companies (SBICs), "privately owned and managed investment funds, licensed and regulated by SBA [Small Business Administration], that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses". This act ushered in a new era in the professionally-managed venture capital industry. More information to request SBIC financing for a small business is available here.

Shockley Semiconductor and the companies formed by these eight former employees created a core of high-tech companies in the area to the south of San Francisco that later became the Silicon Valley.

According to a recent report by the National Venture Capital Association, from 1970 to 2010 venture capitalists have invested over $210 billion in almost 10,000 companies in California. Public companies headquartered in CA that were once venture-backed account for almost 3 million US jobs. 23% of venture capital in CA goes to the software industry, 22% to energy and 15% to biotech.

Route 128

This highway around Boston, has been dubbed "America's Technology Highway" because of the large number of high-tech firms that set up in its vicinity from the 1960s onward, including Digital Equipment Corporation. The dotcom boom saw the venture capitalists' attention shift to software stronghold Silicon Valley, but the boost of innovation in the life sciences has benefited Boston with its world-class hospitals such as Massachusetts General Hospital, and the Route 128 area is now also a stronghold of biotech innovation.

A venture capitalist in a Boston firm explains in an interview with FastCompany.com why the area offers prime opportunities for innovators, from the presence of Harvard and MIT (but also, unmentioned in the article, Babson College, whose programs are regularly ranked as among the best in the nation for budding entrepreneurs, Tufts, Brandeis, Boston University, Boston College, Northeastern University and many others) to the strong hospital system to the presence of large companies and even the many intellectual property lawyers and the proximity of New York City.

The website of the Martin (1958) Trust Center for MIT Entrepreneurship mentions that, according to a recent study, "there are currently 25,600 companies in existence founded by living MIT alumni that employ about 3.3 million people worldwide. Those companies generate annual world revenues of $2 trillion, producing the equivalent of the 11th-largest economy in the world."

This report by the National Venture Capital Association states that:

• From 1970 – 2010 venture capitalists invested over $50 billion in almost 3,000 companies in MA.
• Public companies headquartered in MA that were once venture-backed account for over 750,000 US jobs.
• The biotech industry accounts for 36% of the venture capital funding in MA while software represents 15% and medical devices & equipment 12%.

But Boston is not resting on its laurels: under the stewardship of Mayor Thomas Menino (the longest-serving mayor in the history of the city, who took office in 1993), it created in 2010 an Innovation District on the waterfront, so that companies no longer have to move to the suburbs to benefit from the innovation ecosystem pioneered by Route 128. Maybe the biggest threat to Route 128 comes from Boston itself rather than San Francisco. Babson College recently opened its Boston campus in the Innovation District, and many companies have already set up shop in the neighborhood, such as DataXu, Boston Technologies, Fundraise.com, Apperian, Greentown Labs and NPR Digital Services.

More resources

A good book comparing the Silicon Valley and Boston's Route 128 up to the early 1990s is Regional Advantage by AnnaLee Saxenian, the Dean of the School of Information at UC Berkeley. She finds significant differences in culture, with the Silicon Valley companies being in her opinion more open to collaboration and sharing of innovation. Because her book was published in 1996, it does not cover the recent breakthroughs in the biotech industry and the way life sciences companies have affected the balance between East Coast and West Coast.

The MIT Entrepreneurship Review recently published a post by a Principal with Redpoint Ventures entitled "What is really going on with venture capital". It explains a lot of the basics, including the difference between general partners (the "individuals investing in startup companies") and limited partners (funds that provide capital because they seek returns and, in the current climate, have "retrenched from investing in venture funds"), but also depicts in detail the state of venture capital today and provide a lot of interesting data such as the median time to IPO and M&A, which have increased from 4.5 and 3 years in 1998, respectively, to 9.6 and 6.5 a decade later.

In the author's view, "[t]he costs of regulatory compliance imposed by Sarbanes-Oxley or SOX, is a hefty drawback for vibrant private companies eyeing IPOs [because] SOX regulations meaningfully impact profitability margins." He argues that the recently introduced Reopening American Capital Markets to Emerging Growth Companies Act would alleviate this problem by creating a category of Emerging Growth Companies, which would have up to five years to comply with certain regulatory requirements, including Section 404(b) of SOX, of which companies with market capitalization below $75 million are already exempted.

Such an act would hopefully affect both the Silicon Valley and the Route 128/Innovation District areas by fostering the continued growth of the companies in their fold.

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