Venture Capitalists Are Not the Disease Ailing Silicon Valley. They’re Merely a Symptom.

Decoding the tech world.
July 9 2014 3:17 PM

Venture Capitalists Are Not a Disease

They’re only a symptom of what’s ailing Silicon Valley.

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It seems strange and stifling that the biggest innovations seem to be emerging from established giants instead of visionary startups. What happened to all the startup innovation of the 1990s? The first wave of startups in Silicon Valley, from Netscape to Yahoo to Hotmail to YouTube to Google, didn’t create the Internet and Web—they just commercialized it. They were standing on the shoulders of giants: universities, research labs, and the U.S. government, particularly the Defense Department.

Prior to the burst of consumer-oriented Internet startups in the mid- to late-’90s, the tech industry was much more low-profile and more tightly coupled to academia and government. (You can read more about the prehistory of Silicon Valley here.)  A Cold War–era collaboration between the government, academia, and industry designed and built the Internet through a long and often tedious process of meeting in rooms and debating standards. The pioneering Web browser, Mosaic, was developed by the federally funded National Center for Supercomputer Applications at the University of Illinois at Urbana-Champaign before being spun off into Netscape. This was the basic research, and it was over by the mid-1990s, before modern-day Silicon Valley had really begun. Atop that solid infrastructure, startups colonized and commercialized the wide-open Web and its unexploited resources. But the gold was already there.

In contrast, true startup companies like Apple and Microsoft, which lacked those ties to academia and government, innovated only in the consumer sector: They did things faster, cheaper, and more scrappily than IBM, DEC, HP, Intel, and research institutions such as Bell Labs and Xerox PARC. Apple’s main innovation—the graphic user interface of the Macintosh—was largely drawn from basic research done at Xerox PARC. Apple didn’t build it but just designed hip hardware for it—an achievement, to be sure, but nothing that will network the world or solve world hunger. Silicon Valley never did make those sorts of innovations.

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But we have not seen innovative technologies emerging from the academic research sector in recent years, either, and there are two reasons. First, there is a brain drain: Many of the top minds in computer science have headed to industry for cushier and often more interesting jobs at Google or Microsoft or wherever. Second, the U.S. has ceased to make the investment in education and research that it did during the Cold War. The groundwork for innovation has eroded. In the 1950s and 1960s, all sorts of crazy ideas could get funded by the Defense Department with few strings attached; now, researchers at universities or government contracting firms like Raytheon spend a huge percentage of their time filling out grants begging for a piece of a shrinking government pie.

Look at the big picture, and it is no wonder why the conditions for fundamental innovation have cratered. The U.S. economy has been near stagnant for years. Neither political party is advocating for wide-scale general research with uncertain applications. Our government is practically nonfunctional, wasting billions on government shutdowns and debt ceiling arguments, while it can’t even build a simple health care website without an organizational crisis. Andreessen complains about the tech press, but consider the top-read business daily in America: On the same day that Mims’ piece ran, an op-ed appeared in the Wall Street Journal, “The Case for Crony Capitalism,” which urged deregulation as the solution to all ills; meanwhile, another celebrated cutting unemployment benefits. The front page is concerned with stock prices and Obamacare’s failings. With this dreary thinking the norm across the government and the media, blaming Silicon Valley VCs for not being visionaries is like blaming termites for infesting the rotten wood of your unmaintained house. They’re just doing their job.

As Mims suggests, the sort of widespread research and investment that brought us the Internet and the Web stands the greatest chance of restoring some of America’s reputation for technological innovation. But a look at the history shows that VCs are not the problem, nor are startups the solution. Those who forget the past are condemned to be unable to repeat it.

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