• 12.15.10

Silicon Valley Venture Funds Head East to China

This year’s Venture Summit Silicon Valley had three major topics: the state of American innovation; the globalization of capital (and the rise of China); and the impact of secondary markets.

This year’s Venture Summit Silicon Valley had three major topics: the state of American innovation; the globalization of capital (and the rise of China); and the impact of secondary markets.

Joe Schoendorf

Joe is with ACCEL Partners, and (he told us proudly), the only member of the Executive Committee for the World Economic Forum who doesn’t run either a Fortune 500 or a country. On that committee he represents innovation. He had just returned from setting the agenda for next year’s conference, and he had a lot on his mind.

He began, like A Tale of Two Cities, by telling the audience these were the best of times and the worst of times. The best because there is more innovation going on all over the world than he had ever seen, and the best because the NASDAQ is still at 50% of its all time high in 2000. Silicon Valley, he reminded us, was founded in the very worst of times: 1939. Throughout the l930’s, unemployment went as high as 25%, and when Bill Hewlett and Jim Packard left their secure jobs at GE to follow their dream, it was still 17%–about what it is in California today. Likewise Intel was founded at the end of a recession and endured the recession of the 70s, and Cisco started in the recession of 1987-88.

Even with the high rate of unemployment in California, however, this downturn might not be a good time to start the kind of company that made Silicon Valley famous, because there is such a shortage of engineers in America. Engineers create the products that cause all others hires: finance, marketing, support and sales.

Then Joe changed his tone dramatically and hammered home his major message: our education system in this country sucks and it’s in the process of killing the U.S. Of the top twenty economies in the world, America has a poor record for training scientists and engineers. In the fourth grade, the math skills of American students are still about average, but by middle school America has dropped to the bottom third, and in high school we aren’t even in the top 20–we’re 24th in math and science skills.

And that’s because our teachers are not equipped to teach. 55% of high school physics teachers don’t have either a major or minor in science. And our math education is a mile wide and an inch deep. In a year’s math course, Americans learn 35 subjects, where other systems teach four in depth. The best thing he said?

“We need to teach kids how to use math, not to do math. We teach kids how to do math. You can do math today on a calculator.” And we must do it early. Getting kids into math and science starts in first grade with excitement. You can’t turn that on in high school. He also repeated the Silicon Valley mantra that a green card should be stapled to every engineering diploma given in the United States, so that young educated people who come here for higher education can stay and start companies or work.

Joe told us we were living in one of the three most exciting eras in history. The first was the Renaissance, the second the Industrial Revolution, and the third is still happening. It is the as yet unnamed effect of 2.5 billion people being added to the global economy.


Reminder: in 1910, 90% of the people who worked, worked on farms. Now, although only 3% of the world works on farms we are still feeding the world. And despite the drop in manufacturing employment we notice between the costs, our share of the global manufacturing market hasn’t really gone down more than 4%. The dislocation is that we have automated manufacturing so we can build everything we have to build with half the people.

As a member of the WEF Executive Committee, Schoendorf gets to help determine what the Black Swan event for next year’s Davos will be, and what should be on the agenda. His guess: food shortages. For the first time since WWII, global food productivity went down. China may have 400 million people as wealthy as the VCs in the room, but it also has 700 million people who didn’t have an adequate dinner last night.

China: Whether these guys (all guys) were optimistic or pessimistic this year about the VC market, not one of them failed to mention China. Venture capital as an industry is changing; it’s less in semiconductors, and more in cleantech and genetech. And it is no longer a one stop shop. Capital has moved, and every major VC is investing in Europe and China. But they aren’t investing in China as a market for American companies; they’re investing in the Chinese companies themselves, with local partners on the ground.

China is catching up very fast, and the Chinese are great entrepreneurs, with a great appetite for risk. China has already commandeered the market in telecom equipment, and the market cap of all the Chinese Internet companies combined is about the same as all of ours combined. If China fails, according to Schoendorf, it will only be because of the corruption in its government.

The Secondary market: the existence of a market for the shares of young private companies has been an enforced quantum shift in thinking for VCs. The rise of companies like Second Market, which allows entrepreneurs to achieve liquidity without a true exit event has forced VCs to reconsider whether it’s okay to let the entrepreneur eat even though you’ve invested money in his company. A VC wanted a “hungry” entrepreneur–hungry for a big exit. Formerly, the thought of an entrepreneur taking money out as an investor puts his money in was anathema.

Now the thinking has changed to “if you want a founder to go big, you have to allow him to take some money home to his wife so she quits asking him how come they still live in a rented apartment if he’s an important CEO. Today I heard secondary markets as a modest distraction and a source of relief.

About the author

Francine Hardaway, Ph.D is a serial entrepreneur and seasoned communications strategist. She co-founded Stealthmode Partners, an accelerator and advocate for entrepreneurs in technology and health care, in 1998.