Quarterly Reports To: Charles Kruger Date: January 15, 2002 From: Tim Lenoir

Nathan Rosenberg Harry Rowen Jon Sandelin Christophe Lécuyer Jeannette Colyvas Takahiro Ueyama Rebecca Sheehan

Re: Stanford Startup Report, September-December 2001 The Project Team Funding for the Stanford Startup Project was granted in January 2001. Rosenberg, Rowen and Lenoir met frequently during the spring quarter of 2001 to plan the project, but due to teaching commitments and the need to hire a postdoc and research assistants, the project did not officially launch until September 2001. In addition to Rosenberg, Rowen and Lenoir, our project has been fortunate in having been joined by Jon Sandelin from the Office of Technology Licensing. Christophe Lécuyer joined the project as a postdoctoral research fellow. Jeanette Colyvas is a graduate student working on the project. In addition we have been joined by Prof. Takahiro Ueyama, an economist and historian of science and technology from the Sophia University in Tokyo. Dr. Ueyama is at Stanford for two years as a SSRC fellow and is working closely with Lenoir on the history of biomedical innovation at Stanford. We have hired several undergraduate research assistants to work on the project. General Orientation of the Project Previous research on Stanford and the Silicon Valley has focused almost exclusively on the role of Stanford engineering and science departments in generating innovations, training scientific and engineering talent, and stimulating young entrepreneurs who have been significant forces in the economic and technological development of the region. We, too, are exploring Stanford contributions to the Silicon Valley phenomenon, but we are also interested in the ways in which Stanford has been shaped by its external environment, both locally and nationally. We view Stanford is perhaps the paradigm case of a university deeply integrated into networks of mutually beneficial, symbiotic exchange with industry, forming what might be characterized as a university-regional innovation complex. The flows of influence and dependence have been both ways: Stanford has contributed to the emergence of Silicon Valley through the flow of people, ideas, and technology. On the other hand Stanford has also been profoundly shaped by Silicon Valley. Through connections with industry Stanford research programs have been pushed toward new frontiers. Silicon Valley has contributed to Stanford by providing funds for research, by posing research questions that push the boundaries of fields such as materials science, microprocessor architectures, and database design, and by the movement of technology, technical know-how, and people from industry to the University. The aim of our project is to investigate the sources and strategies for building Stanford's capabilities as a center of innovation. In short, we are seeking to understand how Stanford works. During the first quarter of our project we met frequently to discuss areas of research and particular case studies that would enable us to develop the picture of Stanford outlined above. We interviewed several key figures of interest to our story, including Bill Miller, Donald Kennedy, and Jim Gibbons. Harry Rowen also interviewed a number of Business School faculty during the summer and fall. Early on it became clear that Stanford’s relationship to the Silicon Valley cannot be reduced to a single formula. Even preliminary discussions made clear that Stanford has played different roles at different times in the rise of Silicon Valley and that Stanford has developed different types of relations with the Valley's high-tech sectors. In some industries, such as microwave component and system manufacturing or biotechnology, the University played a major role in educating key scientists, engineers and entrepreneurs who made major innovations such as the klystron and nuclear magnetic resonance instrumentation. In other industries, such as semiconductors, Stanford initially played a more modest role, acting more as the recipient than as the initiator of incentives for new lines of research. One of our first targets of research has been to examine the early models for institution building at Stanford in the 1950s and 1960s. To begin with we wanted to be clear about the “Terman model”

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and how extensively it was adapted to departments outside the electrical engineering and physics departments. A primary focus in this regard has been the Medical School, which moved to the main campus and experienced its transformation into a biomedical research center during Terman’s years as Provost. Lenoir, Lécuyer, and Ueyama First Quarter Highlights Lenoir and Lécuyer worked on aspects of Terman’s role in building Stanford programs. In the attached summary report Lenoir discusses the importance of Terman’s wartime experience at the Radio Research Lab at Harvard, and discussions he had at the end of his stay there with a number of key figures in building the post-War framework for sponsored research and government-industry-academic relations, Vaneevar Bush in particular. Terman returned to Stanford with a plan for using government grants and contracts for hiring faculty to build new research-oriented programs in engineering with close connections to physics and to industry, so-called “steeples of excellence.” As Terman began to develop this scheme for “steeple building” additional elements were evolved to link Stanford research into industry without compromising the leading-edge research quality of Stanford programs by taking on application work for industry. In this context the industrial park, the Honors Cooperative Program and the Industrial Associates programs all emerged as components of a systematic program for building a technical community with Stanford research at the core. As Lécuyer goes on to show in his examination of the growth of the Honors Cooperative Program by 1974 it enrolled approximately 2000 students a year from local industrial firms and had granted graduate degrees to some 1500 engineers in local industry. Lécuyer adds important dimensions to the depiction of the Terman model by pointing to the ways in which Terman sought to bring technological fields into the university that had been cultivated initially by industry, in effect drawing upon industry expertise to launch academic research-oriented discipline building. Lécuyer sites the early example of power tubes as well as solid-state physics programs as important fields in which Bay Area electronics and semiconductor firms were critical resources for launching Stanford programs. Going beyond the Terman era in an examination of the formation of the Center for Integrated Systems, Lécuyer argues this center provides an excellent window into the transformation of the engineering school and its relations with Silicon Valley in the 1980s and early 1990s. With the CIS Gibbons, Linvill, and Meindl wanted to integrate the solid state laboratory, the integrated circuit laboratory, and the computer systems laboratory with the goal of building a multidisciplinary research center that would mesh the cultures of semiconductor processing, circuit engineering, and computer science. CIS, Lécuyer argues, pioneered joint, pre-competitive research with industry. This provided the model for other industry-oriented research consortia at Stanford such as the Stanford Institute for Manufacturing Automation, the Center for Telecommunication, and, more recently, the Center for Photonics. Lenoir has begun work on the extent to which the Terman model was adapted to the restructuring of the Medical School after its move to the main campus in 1958. Lenoir and Ueyama have examined the financial records of the university as listed in Stanford annual reports, papers of the Board of Trustees, and in the files of the offices of the president and provost from 1950-1983. In his report Lenoir points to a pattern of expansion first associated with Terman’s programs, whereby government grants and contracts are used to finance the growth of faculty research programs. In the Terman model as we describe it, those programs are also closely linked with concerns about technology transfer, and hence with efforts to create liaisons with industry through teaching (Honors Coop Program), consultation, and licensing arrangements. Lenoir and Ueyama are developing several case studies in the biomedical area to investigate the extent to which this same style of expansion was adapted to the growth of biomedical research at Stanford. The first of these studies (in collaboration with Lécuyer) is on the medical accelerator developed by Henry Kaplan and Edward Ginzton in the Hansen Microwave Lab and the radiology department of the medical school during the 1950s and 1960s. We have already done most of the research on this case study and expect to have it written up in the next reporting period. The other research we have initiated is a history of the biochemistry department. Lenoir has contacted several key faculty members in the department and is focusing on the developments of in the biochemistry department of the late 1970s and 1980s. A pattern suggestive of Terman’s old “steeples of excellence” strategy appears to have evolved in the biochemistry department. Whereas faculty research might have pursued any number of new areas, rather than pursuing, for example work on drosophila or other organisms, Stanford biochemist and molecular biologist focused on problems related to human genetics and molecular medicine. Preliminary interviews have pointed to discussions in numerous faculty meetings at the end of the 1970s where programmatic decisions of this sort were discussed—and not without dissent. Moreover concerns about orienting the work of the department toward technology transfer are also reported to have been a hotly debated in these meetings. Lenoir and Ueyama are exploring these and related aspects of the development of biochemistry at Stanford and its relation to the biotech industry.

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Rosenberg and Colyvas First Quarter Highlights Rosenberg and Colyvas have been working on the role of the Academic Medical Center (AMC) as a major site of the innovative output of Stanford University. The reason for this focus is straightforward. Data on the patenting and licensing activities of all American universities identifies a recent institutional development of great economic and, more generally, human significance: the AMC is now the dominant contributor, within the university research community, to technological innovation. They point out that whereas in 1970, one-eighth of the patents issued to universities were for biomedical inventions; by 1990, the percentage had doubled. Presently, over sixty percent of all university licenses are based upon biomedical inventions. With respect to Stanford, the AMC is already known to be the dominant source of patent royalties. Indeed, only a few years ago, four of the top five (cumulative) patent revenue earners at this university came from the medical school (and the top 4 medical patents constituted, by themselves, well over half of all Stanford patent revenues). But it is our purpose to go beyond this rather stark overview. Much of the work of this first quarter has been on normalizing the data from various sources on patents in the Stanford Office of Technology Licensing. Rosenberg and Colyvas have been pulling information together into a “relational” database that, in the first phase, would allow the dockets (inventions), invention title, inventor(s), department(s), school(s), and income generated by year, with grand totals all to be interrelated. This information is available in various formats at the OTL. However, it does not exist in a unified form that goes back to the inception of the OTL with links to all the variables required for their analysis. Using this patent data, Rosenberg and Colyvas intend to develop, for the University as a whole, a much more detailed picture of the specific sources of innovative activity. Patent analysis is intended to be supported by case study research that will attempt to go beyond the limits of patent data. In order to develop an enlarged sense of how AMC inventions have contributed to improvements in health care in ways that are not adequately reducible to measures of patent royalties. For among the case studies they are developing is one on the fluorescence-activated cell sorter, developed by the Herzenberg Lab. This work created an entirely new research field called “flow cytometry” and has made a major contribution to what is potentially one of the most important medical breakthroughs of recent decades: monoclonal antibodies. Another case study Rosenberg and Colyvas are working on is Stanford’s contribution to the CT scanner. Rowen First Quarter Highlights Harry Rowen has concentrated on two main areas this quarter. His primary focus has been on the evolution of the curriculum of the Stanford Business School and on the interactions between the Graduate School of Business and Silicon Valley. Over the past few months, Harry and his assistant Rebecca Sheehan have made a number of inquiries into the GSB’s curriculum, its faculty, alumni, and the services of the School as they bear on entrepreneurship. They have also asked about how the Valley’s firms and executives affect or are involved in the School’s research and teaching. To this point they have interviewed 11 current Faculty members and several staff members as well as examined data about alumni. More interviews are planned for the next quarter. Of major importance for this study are the impressive entrepreneurial resources of the School. Among these are the Center for Entrepreneurial Studies, cases, search funds, and job and summer fieldwork databases accessible only to GSB students. Harry and Rebecca have interviewed alumni coordinators in the GSB alumni affairs office and used the Wellsprings of Innovation website as well as the GSB Alumni Survey prepared by Stanislav Dobrev under the supervision of Professor William Barnett in June 1998. Understanding the historical context of the evolution of the GSB has been essential to Rowen and Sheehan’s study of how the evolution of the GSB has affected its relationship with firms and individuals in Silicon Valley. One crucial factor was the attitude of President Wallace Sterling towards the School in the 1950s. Another major influence in the rise of the School’s national standing, as well as an important determinant of the values it continues to hold today, is the Ford Foundation’s Gordon-Howell Report of 1959. The Report critically assessed the School’s weaknesses and made crucial recommendations for its improvement. Conversations with James Howell, as well as an interview with him conducted in 1984 by Selections magazine, have provided a valuable perspective on the philosophy that shaped today’s School. Rowen and Sheehan point to the importance of considering different types of interactions and take a broad view of the concept of “interactions.” In the outward direction, that is from the University to industry, it includes ideas originated by

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faculty and students that result in new products and new companies and teaching that bears directly on the technologies and practices in the Valley, including on entrepreneurship, a distinguishing feature of the local economy. In the inward direction, that is from industry to the university, are technologies, business practices, ideas for research, lecturers and consulting professors, opportunities for consultantships for faculty, and access to material in companies useful in teaching, including cases, internships and summer jobs for students, And, not least, is money in the form of gifts. Distinctions have had to be drawn on the boundary of this investigation, not all of them easy to make. One is the definition of “Silicon Valley,” given that the University’s research and teaching activities are not circumscribed by geography. If, for example, a GSB student or recent graduate founds a computer company in Taiwan that has significant operations in Silicon Valley, it might be a stretch to record it as a Silicon Valley startup, although it would qualify as a case of high tech entrepreneurship with a Valley presence. Rowen notes that the method for dealing with such distinctions is decidedly non-rigorous, “We are looking for local interactions and if we record some that aren’t quite that, so be it. We believe that most of our data will fit.” Another problem is defining a “Stanford” startup or product given that most companies and ideas for products have multiple sources. For example, an exercise in which the market value of companies that have Stanford faculty and graduates among their founders added to one on the market value of companies with MIT faculty and graduates would produce an over count (with some founders, such as David Packard having attended both institutions). Another is causation. For example, does the high level of entrepreneurship exhibited by GSB graduates during the 1990s reflect changes in the School, changes in the character of the students, or increased opportunities in the Valley? We guess that it is some combination of these. Although we record changes in the School during this period we are unable to sort out these influences satisfactorily. There are data problems as well as definitional ones. Despite some useful sources, much is unrecorded, or at least records are incomplete and widely scattered. One useful source is the Wellsprings of Innovation Project which has assembled data on the companies founded by Stanford graduates but, as noted below, it has limitations. Another source is a recent alumni survey. By comparison with the work of our colleagues who are examining the Engineering and Medical Schools and the Office of Technology Licensing, it seems that we are dealing for the most part with less tangible influences. They can often identify some item of technology (e.g. reduced instruction set computing) and a company (e.g. MIPS technologies) with a professor (John Hennessey). Although some such identifications are possible for the GSB faculty, most of the School’s influences in the Valley have been through the activities of former students (and some while they are in residence). Because students are transient, it is a challenge to identify their roles and, especially, the factors that have influenced them – aside of course from such stars as Scott McNealy and Vinod Khosla, two former MBA students who were among the founders of Sun Microsystems. Here are the tentative main findings of Rowen’s study to date: A very short version of the story is that the School was transformed after the 1950s to being a widely acclaimed analytical powerhouse and that this transformation posed an obstacle for its ability to address the highly entrepreneurial types of Silicon Valley firms. However, after the mid-1980s, the School made a major effort to do this with considerable success. By 2000, the GSB had carved out a strong competitive position among business schools in research and teaching on high tech entrepreneurship. The other main area of Harry’s work this period has been on the rise of Stanford’s ranking as a research institution in business, engineering disciplines, the sciences and biomedical fields. How has Stanford been perceived in comparison with other peer institutions over the years? How has that perception changed, and in what areas? There is no simple source to turn to for answers to these questions, but they are crucial indicators for the project we are undertaking. In his public addresses on the rise in the status of Stanford engineering that in the 1950s the playing field was essentially level. Some institution builders realized better than others how to turn the situation to their advantage. We are interested in learning how different generations of Stanford administrators made Stanford such special institution. Sandelin First Quarter Highlights We are extremely fortunate to have Jon Sandelin as part of our team. During the past quarter Jon completed a history of Stanford’s Office of Technology Licensing. Jon has agreed to allow us to draw upon this history in our work and it is appended along with our other reports for this quarter. Jon’s study documents a trend supported by many of our early case studies. A central point this history makes is that the success of the OTL has been the attitude and approach of

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Stanford University in proactively creating strong relationships with industry. Stanford has historically (at least for the past 50 years or more) actively encouraged involvement with industry. Many of the programs are listed at the website: http://corporate.stanford.edu. Sandelin argues that the relationships created by these proactive efforts have been very important in the success of technology transfer and formation of university-linked start-up companies. He shows that they have also brought considerable funding to Stanford. For example, in the fiscal year 1999/2000, corporate revenue to Stanford totaled $172 million, from the following sources: 1. $11.3M from company subscriptions to the Stanford Center for Professional Development. This School of

Engineering initiative (now over 30 years old) provides state-of-the-art instruction to employees of 450 member companies (world-wide) via closed-circuit television and over the internet. If accepted for enrollment, an employee at their company location can earn a Masters of Engineering degree, however non-degree and audit options are also available. More information is available at the website: scpd.stanford.edu

2. $17.7M from Industry Affiliate Programs. Companies pay an annual fee to these department-managed programs to receive a number of benefits, typically (a) preprints of publications; (b) a resume book of all students; (c) a designated faculty liaison person; and (d) an annual two-day meeting to meet faculty and students and to hear presentation on the latest research results. Further information is at: corporate.stanford.edu

3. $36.9M from royalties under licenses granted by Stanford’s Office of Technology Licensing (OTL). Further information at: http://otl.stanford.edu

4. $42.1M in industry sponsored research. The research sponsorship agreements are negotiated by the Industrial Contracts Office (ICO), which is a part of OTL. The ICO also handles collaboration agreements (industry/university joint research programs, typically with exchange of people and loans of equipment, but no funding) and Material Transfer Agreements. Further information at: http://ico.stanford.edu

5. $64M in donations and gifts through Stanford’s Office of Development. These donations may be contributions towards buildings (many rooms in new buildings have plaques identifying a corporate contribution towards the cost of constructing the room), endowed professorships (where the corporate name will be linked in any public listing of the professor’s name), or contributions to Interdisciplinary Research Centers, where the company may have a representative on a research advisory committee and may also have company scientists work in such industry-supported Centers. Total donations in FY 1999/2000 exceeded $300 million, with a good portion from wealthy individuals (usually alumni) either while living or as a bequest when they die. Stanford makes great effort to maintain contact with alumni and has extensive programs, usually coordinated through a world-wide network of Alumni Clubs.

Building Project Resources: Archives and Databases In addition to the case study research we have been conducting this quarter a good deal of effort has gone into building databases and a web-based archive. Rosenberg and Colyvas are building a database for the patent data they are working on. Lenoir has worked closely with Maggie Kimball and her staff in Special Collections to generate an archive for the data and primary source materials we are using in our work. Lenoir has constructed the archival database in Filemaker and adapted it to the web. The sources we use will be referenced according to the storage and location conventions of Stanford Special Collections, and any new materials we generate, including documents, images, interviews, and video footage, will go into the archive for future scholarly work. We also intend this database to provide access to our primary source documents. Text documents are being scanned with Adobe Acrobat Capture and deposited on server space allocated to our project. We envision two final products; a book with all the standard scholarly apparatus, and a website with special features and access to our databases and primary source documents. Examples of the text source files we have generated can be seen in the html version of Lenoir’s report: http://www.stanford.edu/dept/HPS/TimLenoir/Startup/. The Filemaker database will become operational later this week. Attachments

1. Lenoir First Quarter Progress Report 2. Lécuyer First Quarter Progress Report 3. Rosenberg and Colyvas First Quarter Progress Report 4. Rowen First Quarter Progress Report (to follow) 5. Sandelin History of OTL

Quarterly Reports Lenoir First Quarter Progress Report The Terman Model: Steeple Building and a Recipe for Distinction Tim Lenoir January 13, 2002 In 1945 Frederick Terman returned from his wartime position as director of the Radio Research Laboratory (RRL) at Harvard to take up new responsibilities as dean of Stanford’s School of Engineering. Terman came with a plan for putting Stanford’s engineering school on the map as one of the premier programs in the nation. It was a plan born of his experience managing the RRL, combined with observations of the administrative structure and philosophies of Harvard and MIT. As a former student and close friend of Vaneevar Bush, Terman was privy to the discussions in Bush’s circle about building a post-war alliance among government, industry and academe. While still at the RRL Terman began to shape a formula for success. It involved using government funding, principally ONR contracts, to build 1) a premier faculty in areas of electronics, which Terman was confident would be the major engineering growth area in the post-war environment; 2) build a large Ph.D. program, transforming the curriculum from one focused solely on practical engineering training to one infused with physics, mathematics and the social sciences. Terman and a handful of his close academic friends believed that the university would be he key to postwar industry. In the research triad—government, industry, university—Terman believed the postwar university was the source of key innovations. Terman brought three ONR contracts for work in microwave physics and engineering with him when he returned in 1945-46. These resources were the beginning of a new university. The primary resources for Terman’s vision for Stanford were government grants and contracts. In contrast to some of his colleagues at Stanford, such as Board of Trustee President, Donald Tressider and even President of Stanford Walter Sterling, Terman hoped to build close alliances with industry, but he did not think industry funding held the key to building a university in the post-war era. A number of efforts had been made by universities such as MIT before the war to finance research with industry funding, all with mixed results. Stanford’s experience with the klystron patent in the late 1930s was typical. The invention was made by physicist William Hansen and developed by Russell and Sigurd Varian. Licensing the patent to Sperry Gyroscope promised to supply the Hansen lab with ample funding to pursue their research in other microwave devices. But the relationship proved to be unsatisfactory. Industrial sponsors of academic research like Sperry wanted control over the direction of research in the lab, and they wanted to insure exclusivity with respect to inventions coming out of the lab. Hansen, for example, found that Sperry would not give him, his colleagues and students free reign to pursue their own research on klystrons and other microwave devices the group believed would ultimately benefit Sperry Gyroscope. Moreover, industrial sponsors only wanted to fund work directly related to their own interests. They were not necessarily interested in furthering the academic mission of the lab (or university) through funding of fellowship programs, building construction, or purchase of instruments and equipment not directly related to their own goals. While the klystron royalties were an important resource for the lab, Terman believed that government funding would be a less restrictive and substantially larger source of funding for building academic research programs. This marked a substantial change in attitude toward government sponsorship of research compared to the pre-war period. Prior to the War, universities wanting to remain free and independent in their educational mission had been highly critical and generally rejected government resources for support of research. Moreover federal funding in support of research was not channeled toward private universities. The Manhattan Project, work at the RRL and other government labs on university campuses during the war had changed that. Terman developed what he termed “a recipe for distinction”1 in building Stanford’s Engineering School. The recipe contained two main ingredients: The Mainstream Theory—one should be

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strong in areas of mainstream interest and importance rather than in “niche” areas, even though one might be able to be the leader in esoteric areas. The second key component of Terman’s recipe for success was to increase the science and engineering faculty in key areas where funding could be attracted—he called this his program for building “steeples of excellence.” Terman pursued projects he thought could be “self-financing” and would generate their own momentum of sustained growth. To accomplish this Terman sought to get the very best talent he could. Rather than using government grants to increase salaries of faculty already on staff, Terman pursued what he termed “salary splitting.” The strategy was to pay for half of the salary of a new faculty member from grants and contracts. Research associates and other personnel working on sponsored projects would be entirely covered from contract funds. In addition building expansions and equipment would be funded on contract. Terman’s goal was not just to bring money into the university. The primary goal was to build the premier research program in electronics (or other potential “steeples of excellence”). This was to be accomplished by getting the very best talent in the field and building a graduate program around them. Training of graduate students and the production of Ph.D.s was as important as any other component of the program. Students were to be brought into the research project as part of their graduate training. In his many public discussions of these ideas in the 1960s when he was asked to advise other areas on how to go about constructing their own recipe for success, Terman was insistent on the centrality of the research mission of the faculty. He was scornful of going after a contract for applied research and generally rejected such contracts unless they fit into the overall mission of increasing the prowess of the research component (more on this later). He was critical, for instance, of a number of universities he advised because they went after contracts that they could fulfill with mediocre talent. Rather than simply bringing in contract dollars Terman’s goal was to get funding as a way to hire the best talent. Sponsored projects would then follow on the principle that the direction of research and development in the field was being set by the Stanford Electronics Research Lab. If government funding provided the primary resource for Terman’s program, building a connection to industry was equally critical. For Terman the key thing was to turn ideas into technology, and this required close collaboration with industry. Terman was also concerned about building an industrial base closely associated with the Stanford program. In presentations to engineering societies and various public forums Terman repeatedly insisted that the requirements for a career in engineering had changed since before the war.2 Terman emphasized that engineers needed to be educated much more thoroughly in physics and advanced mathematics than previously, and he observed that technological complexity was advancing so rapidly that an undergraduate education would no longer suffice to prepare an engineer for the challenges of a career in industry. The requirements of modern industry were such that a master’s degree or Ph.D. were becoming a prerequisite for many fields. Terman argued that because of the complexity and rapidly changing demands of electronics, computers, and other areas, engineers would constantly need to upgrade their knowledge and skill by taking 1- 8-week training programs. In this knowledge-intensive environment, Terman believed the university would play a more central role than ever in the creation of new technology. He envisioned what he referred to as a technical community of scholars made up of local electronics firms in the Bay Area and the west coast with research facilities near Stanford staffed by Stanford-trained engineers. It would be a dynamic community where research in Stanford labs would find its way into industry through the training of students and consulting by the faculty. Stanford-originated technologies would find their way into the electronics industry as well, providing revenues for enhancing the research program. Terman also allowed for industry to bring its own problems for research to the university, and as we shall see, he provided numerous ways for this to happen. But foremost in Terman’s plan was that the university would be the center of the technical community providing innovations, training, and guidance. He explicitly sought to limit the influence of both the government and companies in defining the problems labs such as the SEL and the Hansen Lab would investigate. Terman sought to build trust among government and industrial sponsors of research in the technical directions pursued by the research faculty. By maintaining close

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relationships with the needs of government and industry through consulting and training of students the research faculty would naturally pursue projects of benefit to the sponsors as well as advancing the research mission. Thus instead of receiving research funds to pursue specific problems defined by a sponsor, Terman wanted both government and industry to invest funds in the research directions defined by the core faculty of the lab. Even in the case of industry funding, Terman rejected funds for specific applied industry problems in favor of funds to pursue a general research direction of interest to a company. The company funding the research would have privileged access but not exclusive rights to the research results.3 The elements of Terman’s vision began to coalesce in 1950 with the formation of the Applied Electronics Research Lab. The AEL was the outgrowth of the highly successful work under military sponsorship of work in the Stanford Electronics Research Lab, founded in 1946. The primary sponsor of work in the SEL, the Office of Naval Research, was extremely pleased with the work coming out of the lab and approached Terman to create a new lab for the purpose “of carrying Stanford originated ideas to the point where they could be put into industrial production for work in applied electronics. The new work on microwave tubes and microwave circuits was all based on the fundamental research program conducted under Terman’s direction since 1946 and represented an extension of exploitation of the practical possibilities arising from the results of that fundamental research.4 In his memo to President, Walter Sterling, Terman described the program as having a number of important advantages, “and presents us with a great opportunity.” Due to its importance in revealing Terman’s ideas on “steeple building,” the memo is worth quoting at length:

If put into effect would consolidate our already strong position as one of the great university centers for research and graduate instruction in electronics. It also strengthens the electronics program at Stanford, and in particular, increases the value and importance of our basic research program. Again, establishment of this activity at Stanford provides the best possible insurance that we will continue to receive the government support required to conduct a large program of faculty research and graduate student training at high levels at a minimum of expense to the university. Finally, in the event of an all-out war, Stanford would become one of the giant electronics research centers such as existed at MIT and Harvard during the last war. The current negotiations with the Navy represent the pay-off that has come from the program of government sponsored basic research in electronics that we have carefully built up since 1946. This work has been so directed that our efforts have been concentrated on a limited number of topics of fundamental importance where we had faculty members of unusual competence and everything possible has been done to give these faculty members and their graduate students the best possible environment for creative work. As a result, our program has been remarkably productive, and our faculty men have become the leading authorities in the country in their specialties. Now, with the chips down, and the government evaluating the usefulness of the electronic research it has been supporting at different universities, Stanford shows up very well indeed. 5

The formation of the AEL provided stimulation for carrying forward other ideas Terman had been developing for implementing his notion of the technical community of scholars. Probably the most famous of these ideas was the notion of the research park. The Applied Electronics Lab would take on particular relevance if there were industrial firms in the area capable of taking the research and development work initiated in the SEL and AEL and carrying it into products for government and industry. The idea of using Stanford land for commercial property that would bring income to the university was already well underway by 1950. Work in the Microwave Lab under Felix Bloch had already resulted in the creation of Varian Associates by Russell Varian and Edward Ginzton. Founded in 1949, Varian Associates was the first occupant of what would become the Stanford Industrial Park. Terman interested several other electronics firms in following moving research facilities to the 450 acre sector of land designated for commercial development by the Board of Trustees in 1950. Included in this was development of the Stanford

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Shopping Center. In 1952 the decision was taken to set aside land in this sector for the Medical Center that would move from San Francisco to the Stanford Campus in 1958. The Stanford Industrial Park was the area of land bordering on California Avenue, Page Mill Rd, El Camino Real and a sector along the Foothill Road extension of Sera up to Arastadero Rd. The arrangement with General Electric provides excellent insight into Terman’s strategies for linking industry into his teaching and research plans for the Engineering School, and the extent to which Terman wanted to maintain control of the direction of research and insure it would be an expanding resource. In 1953 General Electric received contracts to produce several types of microwave devices, including klystron tubes. In addition GE was interested in the commercial development of radiological devices, particularly the medical accelerator being developed by Henry Kaplan and Edward Ginzton in the Stanford Microwave Lab. GE already had a research laboratory at Cornell but wanted to have closer contact with the work going on at Stanford. Terman proposed that GE establish an advanced research electronics lab in the industrial park near Stanford. In his letter to H.R. Oldenfield, the director of research at GE, Terman expanded upon Stanford’s philosophy of linking research and development in electrical engineering and physics to industry.6 The research program, Terman explained, was an outgrowth of the academic program and was closely coordinated with the instructional activities of the University, particularly in graduate training. Research projects were taken on in fields in which some faculty member had specialized competency, an arrangement that allowed faculty to function effectively both as teachers and research workers without undue inroads on their time. Research projects were frequently used as thesis assignments for graduate students, thus permitting Stanford to employ graduate students as members of the staff of the Electronics Research Laboratory while they are at the same time pursuing their work toward a graduate degree. Terman explained that while the program was focused on research, the policy—indeed the hallmark of the Stanford program—had been to be keenly interested in the development and application of the ideas that are the principal output of the “basic phase of the program.”

Initially, basic research projects are selected in the usual manner, simply on the basis of the extent to which they will add to the knowledge of the subject: but it has generally been found that practical applications of this knowledge are not long in forthcoming, and through the application of judicious assistance and planning along the way we have usually been able to produce, ultimately, not only equations and reports, but also practical devices embodying the principles involved. In some cases the development of these research ideas is carried out under our own applied program: in other cases, our reports and ideas are picked up by other universities or by industry and developed in final form.

Terman explained in considerable detail the general form of relations with industry. Because so much of the work of technology transfer depended upon personal contact with the scientists and engineers who developed the ideas and prototypes, Terman favored developing close contact with industry in the local vicinity:

Informal but intimate relations are maintained with a number of concerns in this immediate vicinity including Sylvania Electric Products Incorporated, the Hewlett-Packard Company, the Eitel-McCullough Company, Penta Laboratories (Santa Barbara), Huggins Laboratories, Litton engineering, and Varian Associates. In some cases, basic products of these companies include devices which were originated at Stanford, sometimes by members of the staffs of these companies while studying at Stanford. Members of our staff frequently serve as private consultants to these companies and have been instrumental to an important extent, in assisting these concerns with the design of equipment and devices marketed by them. Examples in point are the high-power klystron amplifiers being produced by Varian and Eimac.7

The development of the industrial park was a key element facilitating this program. The details of the arrangement with General Electric were similar to arrangements Terman made with other firms in the industrial park and shed interesting light on the interconnection of several key

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components in his plan to build steeples of excellence. GE’s interest centered on microwave and linear accelerator devices. They proposed an initial ten year arrangement with Terman’s Electronics Research Lab and the Microwave Lab to acquire and exploit Stanford knowledge in these areas for both military and commercial products. GE would site a research center in two buildings of approximately 20,000 square feet in the Stanford Industrial Park. According to the agreement Stanford would provide the land and all improvements on it, construct the buildings, and Stanford labs would provide mechanical and machine work for construction of the laboratory, located on California Avenue near El Camino Real in the Stanford Industrial Park. The Stanford commitment would be liquidated over a short period in the form of rent. General Electric agreed to lease the facilities from Stanford. According to the calculation of GE officials, the initial investment in plant ($118,000) and equipment ($138,000), totaled $248,000 the first year and declined to $185,000 and $180,000 the following two years. In addition Stanford received an overhead on the investment of 160% the first year, 122% and 117% the following years, with the total cost to GE at $1,308,000.8 In addition to research facilities located near Stanford, the General Electric Electronics Research Center appointed several faculty members as consultants. A key part of the arrangement was that Stanford faculty, research associates, and technical personnel would instruct General Electric representatives in the design, development and construction of linear accelerators developed at Stanford. Several faculty were appointed as Principal Associate Scientists to assist and advise the GE staff. GE licensed the Stanford patents on klystrons and medical accelerators relevant to its commercial plans. In addition Stanford received payments of $20,000 for the first two years and royalties of 5% on net sales of equipment using linear accelerator radiation generating components for the initial five years of the Stanford-GE agreement. Any new inventions or patents developed by Stanford staff while working for GE as consultants were to be the property of GE.9 An important aspect of the GE agreement indicative of Terman’s notions of university-industry synergy was that the arrangement with GE and other companies in the industrial park was not conceived as a one-way relationship. Terman was interested in tapping the knowledge and expertise of industry for potential benefit to the basic research program. In the GE agreement, for example, provision was made for certain GE personnel to teach one three-hour course at Stanford in any academic semester without remuneration. GE staff with teaching appointments at Stanford were allowed to advise on thesis work of Stanford students without cost to the university. The documentation for the GE agreement reveal that one of the most innovative features of the program Terman was evolving was its tight coupling of teaching, research, and technology transfer through close working relationships with industry. Terman outlined a number of financial arrangements with companies aimed at facilitating the research and teaching program:

Industrial companies in the area have also made important contributions to our program through the establishment of grants, fellowships, and research contracts permitting us to do work which financial limitations would otherwise prohibit. In some cases, we have undertaken research projects in specific fields with the objective of supplying information and devices which could be further developed for commercial purposes. In such cases our work has been done under contract with the industrial concerns. In other cases, the industrial concern has merely made a grant of funds to the University without stipulating specific objectives beyond a general field of research. From our standpoint, this later procedure is preferable, as it affords greater flexibility: and it is our belief that the industrial concerns involved have been satisfied with the results of such arrangements.10

Equally important was a new educational program Terman launched simultaneously with the development of the research park, the Honors Cooperative Program. Through this program a limited number of employees of the research staff of companies in the research park could take classes at Stanford, working toward master’s and Ph.D. degrees. The Honors Cooperative Program was intended as additional income for financing the hiring of new faculty associated with the research program. Terman explained the relationship to Oldenfield:

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Cooperative educational programs have also been set up with several concerns in the area, under which employees are granted time off for the purpose of attending Stanford courses leading toward advanced degrees. Arrangements of this type are advantageous to us because they enable us to extend our educational program, and from the standpoint of the industrial concern, they have been found to be helpful in attracting qualified personnel to their employment and in developing greater competency in the existing staff.11

Just how relevant to building his research program Terman viewed the Honors Cooperative Program is revealed in a letter to President Walter Sterling in which Terman outlined the arrangement with General Electric:

Dear Dr. Sterling: Here is some information which will be of interest to you an which you may possibly with to report to the Board of Trustees in connection with the General Electric deal. Among the important values to General Electric in establishing an advanced development center at Stanford are (1) the educational opportunities for General Electric employees, and (2) cooperation on the scientific level with Stanford. To implement item 1, the General Electric Company desires to participate in the Cooperative Program and, in fact, has submitted a draft agreement along the lines of the Sylvania agreement. They plan to start three new men each year, which means six men each year after the first. This represents minimum payments to Stanford, supplementing tuition, of about $10,000 over the five-year period of the contract. General Electric wishes to start the program winter quarter if they are able to get in operation that rapidly, otherwise it may be necessary to delay until fall, 1955. Under item 2, General Electric desires to provide some additional support for certain research activities that we are now carrying on, in order to accelerate results that they need for their own defense contracts. They have therefore asked us to submit several project proposals which in the aggregate will total between $50,000 and $100,000. We welcome this because it broadens the base of financial support for our research program.12

We have emphasized that Terman’s primary objective was to build the research stature of groups of specialists—so-called steeples of excellence—by finding combinations of government and industry support to create a self-financed, growing program of research, graduate training, and technology transfer. While government research grants and contracts provided the mainstay of Terman’s program in the 1950s and 1960s, he also sought ways to attract corporate sponsorship, particularly in areas such as solid state physics, where industry was setting the pace for research. [Indeed as Lécuyer shows in his progress report on the Stanford Center for Integrated Systems, Terman had early on developed the strategy of drawing industry expertise into his engineering program and intensifying it through teaching and research programs. The design and manufacture of high frequency tubes was one early example. Semiconductors was another.] A key ingredient in Terman’s recipe for distinction in cultivating industry was not to allow exclusive relations to develop with any particular sponsor. The goal was for Stanford ideas, Stanford patents, prototypes and devices, and Stanford-trained engineers to penetrate as deeply as possible into the needs of industry and government. Terman wanted to multiply the type of relationship his labs had with GE. Exclusive relationships with particular industrial (or government) sponsors interfered with achieving that goal. This point emerges clearly in the next phase of the evolution of Terman’s program, the construction of the Industrial Associates (sometimes referred to as the Industrial Affiliates) program.

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The Industrial Associates program grew out of new opportunities that emerged in the late 1950s in solid state electronics. In the early 1950s Terman had encouraged William Shockley to locate his company in Mountain View near Stanford. By 1958 a number of Shockley’s original dream team of engineers in solid state research (the Traitorous Eight as they were called) had left Shockley to form a new company, Fairchild Semiconductor. Other companies followed in rapid succession. Stimulated by military initiatives to miniaturize electronics components, companies like Fairchild, Texas Instruments, Hewlett-Packard, and other pioneering companies of the post-War transistor revolution began intensive research on semiconductors. Terman and John Linvill were interested in ways of adapting academic programs in electrical engineering to the new developments in the field of solid state microelectronics. What role could an academic program play in these developments? As Linvill pointed out in his study and proposal for entering the field of solid state electronics, transistor manufacturers were already well suited for research on modifying and refining processes for semiconductor device construction of microsystems. “A research laboratory of an educational institution is generally less well adapted to the solution of the microelectronics technology problems of this type,” Linvill wrote. “It [the university lab] must maintain capability to produce any structure in laboratory form and to find new experimental procedures for this task. However, it is not adapted equally with industry to the post-experimental development.”13 Linvill outlined three areas in which he thought the university was best adapted to advance the needs of industry in the solid state field: (a) the study of new solid-state phenomena potentially useful for microsystems. Avalanche multiplication, tunneling, barrier capacitance variation, magneto resistance and many other phenomena associated with solid-state electronics offered possibilities for new computing mechanisms; (b) the conception and experimentation with radically new forms of structures to be utilized in microsystems. Linvill noted that computing systems had up to then been conceived in the physical forms adapted to the elements available for their construction, namely, two-port amplifiers, diodes, resistors, capacitors, and inductors. In moving to new semiconductor elements, Linvill argued that radically different forms ought to be considered:

In particular, there is little necessity to look only to constructing the miniature forms of the old components in integral blocks. One needs to conceive the functions to be performed from a broader point of view....Among the advantages to be sought are the distribution of gain in the structure and conception of forms which minimize the difficulty of connecting parts of the structure.14

Chief on Linvill’s list of new forms and structures was work on neural networks, especially the work of Crane, an employee at SRI pursuing a Ph.D. at the SEL. Crane had invented the neuristor and was exploring the ability of neuristors to perform functions of logic, computation, and storage. (c) the study of radically new design strategies which permit a system to operate in the presence of defective portions or with portions which are degraded by time or environmental changes. Specifically Linvill had in mind the search for a new design theory based on work in the theory of adaptive systems: systems needed to be designed which would adapt imperfections in portions of their structure or to degradation of their component parts as a function of time. Stanford work going in these three general areas was complimentary to the work going on in industrial laboratories. A university lab in solid state electronics could pursue research on fundamental problems on a long term basis without the commitment to employ results in the first systems built. Through such a relationship both industry and the university would benefit. Linvill envisioned a solid state electronics laboratory focused on microelectronics employing five full-time faculty and fifteen research assistants. The lab would start small at first by recruiting one or two key senior faculty, such as John Moll from Bell Labs. Within two years Linvill was envisioning an operating budget of $250,000 for the lab, with substantial growth beyond that likely. Emphasizing the centrality of producing Ph.D.s Linvill described the aim of the lab as undertaking

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projects in the three areas—phenomena, new forms of computer structures and adaptive microsystems—in the magnitude of one Ph.D. thesis. There would be overlap and continuity of problems undertaken but generally the efforts would be individual Ph.D. projects working closely with a faculty supervisor. The strategy for building this new program followed the Terman formula for steeple building: find outside sponsors to hire key faculty and support graduate research; within a brief period the research of these faculty would produce grants, contracts, and royalties that would make the lab self-sustaining.15 In this case, however, the sponsors would be a coalition of companies interested in the potential results from the long-term research in solid-state electronics. As Linvill explained to Mark Shepherd, the VP for research of the semiconductor division of Texas Instruments, the aim of the industrial associates program was to underwrite the appointment of additional faculty members in the solid state field. Affiliate funding would be sought from a minimum of 10 and maximum of 15 companies interested in solid state electronics to underwrite ten-year commitments to the people recruited.16 Such commitments were impossible on the short-term funding of most government research grants and contracts. The faculty recruited in this manner would be given permanent appointments, with the future funding presumably being generated from future affiliate funding, grants, contracts, and royalties. As Terman explained to a potential affiliates member, the goal was to keep the program limited to fifteen companies even if more could be recruited, in order to insure the quality of communication be industrial partners and the Solid State Electronics Lab.17 In addition, the focus would be on local companies close to Stanford such as Fairchild and Hewlett-Packard, or important national companies such as Texas Instruments and RCA with major interests in solid-state electronics.18 The contribution for affiliate membership was set at the surprisingly low figure of $5,000 per year. The list of companies initially considered for membership included: Hewlett-Packard IBM Bell Laboraories Hughes Ampex Texas Instruments Motorola Ramo-Wooldridge Varian Philco RCA Pacific

Semiconductors Lenkurt Beckman Tektronix Fairchild Lockheed Sylvania Hoffman General Electric Stanford Research

Institute Consolidated Electrodynamics

I have outlined several key components of what emerged during the 1950s as Terman’s “recipe for distinction”:

• Using government grants and contracts to finance “steeples of excellence” • Salary splitting as a means to grow the faculty • Concentration on graduate student research and production of MS and Ph.D. degrees • The establishment of the Stanford Research Park as a means to create profitable

exchange relations between industry and Stanford research labs, particularly in areas of electronics

• The Honors Cooperative Program as incentive for companies to locate near Stanford and as a resource for supporting the teaching component accompanying the building of “steeples of excellence”

• Emphasis on licensing Stanford inventions and establishing faculty consulting relations as means for getting Stanford ideas into the core of industry

• The Industrial Associates Program as a way to build research programs complementary to advanced research in industry; and reciprocally as a means to leverage industrial research for advancing academic programs

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A number of quantitative indicators suggest the power and success of this “Terman Model.” We have examined the financial records of the University from the early 1950s through 1983 (in later phases of our project we will bring the analysis up to the present). The impact of Terman’s ideas on university finances and departmental growth are unmistakable. The following several charts provide an overview.

Figure 1: Total Government Grants and Contracts

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Source: Stanford University Financial Reports. Figures exclude funding for SLAC In the 1950s and 60s the Engineering School accounted for the largest sector of government grants and contracts, and within the Engineering School, Electrical Engineering was the major recipient of government funding. A key objective of Terman’s program was to use government funding to increase faculty and build research programs, particularly graduate programs in engineering. Indicators of the success of this enterprise are the growth of school and departmental operating budgets, and the percentage of those operating budget accounted for by outside funding; namely, from grants and contracts as opposed to tuition and endowment sources. It is difficult to obtain records that would permit a breakdown of department operating budgets and sources of income before 1966. In that year a change was made in the reporting of Stanford accounts in the Annual Financial Report of the university that enable us to track sources of income for individual departments. From 1950-1965 the practice was to simply to list the total for grants and contracts and report individual grants as line items in a general ledger rather than listing them by department and school. Hence it is difficult to extract the information we are seeking. This is not to say that data is unavailable for the period between 1950-1965, but Special Collections does not have a systematic and complete holding of the financial records of individual departments for those years. Nonetheless, certain patterns emerge from the information we do have that carry over into the post-1965 period. We present those patterns in Figures 2-4 and extrapolate to the 1950s based on sporadic data available to us for those years.

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Figure 2: Engineering School Sponsored Projects Compared to Total Operating Budget

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Total Engineering SchoolSponsored Projects

Total Engineering SchoolOperating Budget

Figure 3: Electrical Engineering Sponsored Projects Compared to Total Operating Budget

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Electrical EngineeringSponsored Projects

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Figure 4 Sponsored Projects as Percent of Operating Budget:

Total for School of Engineering Compared with Electrical Engineering

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Engineering School SponsoredProjects as Percent of OperatingBudgetElectrical Engineering SponsoredProjects as Percentage of OperatingBudget

What the data indicate is that in the Engineering School roughly 60% of the operating budget for the entire school was financed through grants and contracts. Terman’s program started in Electrical Engineering and it the major external funding resources came to that department. Hence it is not surprising to see an even higher percentage of the operating budget to be covered by grants and contracts. With the high around 90% reached in the mid-1960s and gradually falling to around 70% in the 1980s in the post-Vietnam period, we see roughly 80% of the operating budget for Electrical Engineering covered from grants and contracts. The sporadic data we have for the 1950s and early 1960s suggest that the percentage of the operating budget covered from grants and contracts hovered close to 90%. Indeed, when we shift our attention to the Hansen Labs and the Electronics Lab we find anywhere from 90%-98% of the operating budget covered from grants and contracts over the period we have investigated. That in a nutshell was the Terman program. The other major pillar of Terman’s recipe for distinction was the generation of Ph.D.s in engineering. The data below illustrate just how successful Terman was in this enterprise.

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Figure 5: Engineering School Ph.D. Production

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The overall numbers of Ph.D. students in Engineering is indeed impressive, far outdistancing the production of Ph.D.s in Humanities and Sciences during the years we have examined. Moreover, as the data indicate Ph.D.s in Electrical Engineering accounted for almost the total of Ph.D.s produced in the Engineering School in the period from 1951-62, and accounted for about half the Ph.D.s produced by the School in the 1960s. As we have seen, Terman viewed the Honors Cooperative Program as an integral part of his efforts to attract industrial sponsorship for the research program. The Honors Cooperative Program also served as an incentive for companies to locate near Stanford so that their engineers could receive additional training as well as facilitate the transfer of technology from the university laboratory environment to the company. Terman also considered the Honors Coop Program as providing an important financial resource for expanding the teaching component of his steeples of excellence. The first figures we have for income from the Honors Cooperative Program are in 1960s, and as Figure 6 indicates, that program rapidly became a substantial source of revenue for expanded teaching.

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Figure 6: Honors Cooperative Program

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1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1974 1976 1977 1978 1979 1980 1981 1982 1983

Conclusion and Next Steps We have argued that during his years as dean of engineering from 1945-1955, Terman developed a model for increasing the importance and prominence of the Stanford Engineering School by using government grants and contracts to expand the research and teaching program of the university. His major objective was to build a technical community of scholars—engineers with strong education at the graduate level in physics and engineering—in which close liaisons existed between university research and the advance of technology in government and industry. We have pointed to a number of elements of this program that were tightly coupled in a systematic way to realize Terman’s goals. These included the building of “steeples of excellence” in key areas of electrical engineering and physics, a program of land development that facilitated linking companies with a strong interest in the directions of Stanford research to the university, with an industrial associates program and honors cooperative program as supportive elements.19 From 1955-1965 Terman served as Provost of the university. In that office he attempted to adapt the recipe for distinction he had so carefully worked out for the electrical engineering department to other parts of the university. The medical school, slated to move from San Francisco to the Stanford campus during Terman’s tenure as provost, was a particularly appropriate site for applying his recipe for distinction. Changes in the national funding environment in the mid-1950s opened major resources for transforming medicine by linking it more tightly to the basic sciences. Radiology, headed by Henry Kaplan, was already a medical school department with close ties to engineering and physics. Kaplan collaborated with Edward Ginzton in developing the medical accelerator, and he had close ties to Terman. This project was jointly sited at the Hansen Microwave Lab and the medical school. Kaplan headed the committee to restructure the medical school as part of its move to the Stanford campus. Another project growing out of the radiology department was Len Herzenberg’s work on the cell sorter, a key technology in the early biotech revolution.

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A crucial element in transforming the medical school was the founding of the biochemistry and genetics departments. Coinciding with the move of the medical school to the main campus, the biochemistry department was founded in 1958 when Arthur Kornberg moved his entire department from Washington University in St. Louis to Stanford, a department that included not only Kornberg, but Paul Berg and several other key faculty members. The genetics department was founded a year later with the move of Joshua Lederberg to Stanford from Wisconsin. The departments of radiology, biochemistry, and genetics all fit the Terman model in the style of their growth. As prime recipients of government funding, particularly from the NIH and NSF, these departments were the first medical school departments to finance their growth and operating budgets almost entirely from government grants (Figure 7). They also evolved important relations with industry and made extensive use of the Honors Cooperative Program in building teaching components of their programs directly linked to the emerging biotech industry.

Figure 7: Percentage of Operating Budget Generated by Sponsored Projects in Three Medical School Departments

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BiochemistryGeneticsRadiology

We have begun exploring this hypothesis through detailed examination of the history of the biochemistry department and its impact on the biotech revolution in the Silicon Valley. We have begun collecting documents, interviewing faculty, and assembling case histories. We expect to be able to report on the strategies deployed in building the Medical School in our next summary report. We anticipate that while the Terman model was a powerful stimulus for the 1950s and 60s new styles of program building were crucial by the 1970s and 80s.

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Endnotes Lenoir Report 1Frederick Terman, Recipe for Distinction, notes for Terman’s successor as dean of engineering. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox19/fol6/RecipeForDistinction.pdf 2Electrical Engineering Curricula in a Changing World, 1956 http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesVIIIBox1/fol9Speeches1955/ElecEngChangingCur riculum1956.pdf 3 A number of studies, particularly those of William Stuart Leslie and Rebecca Lowen have depicted Terman as basically selling the university to the military and industry. This picture does not stand up under close scrutiny. Terman, like nearly every other university administrator, sought government funding for academic programs as the only serious financial option for program building. Terman’s own “recipe for distinction” was based explicitly on the university controlling the research agenda and being deeply involved in setting research priorities. 4 Terman to Sterling, 12 September 1950, Terman Papers, Series II, Box 13, fol. 18: http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIBox13/fol18/ProposalAppliedElectronics12Sept1 950.pdf 5 Ibid., p. 1. 6 Terman to Oldenfield, 8 April 1954, Terman Papers, SC 160, Series II, Box 18, fol. 8. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIBox18/fol8/Terman-Oldenfield8April1954.pdf 7 Ibid., p. 6. 8 For details of the arrangement, see GE-Stanford Contract, Terman Papers, SC 160, Series II, Box 18, fol. 8, especially pages 2-3: http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIBox18/fol8/GEStanfordContract.pdf General Electric was assured it cover its expenditures entirely from government contracts and make the enterprise self-sustaining after three years. It was envisioned that during the first few years the lab would work on government projects, but shift to commercial projects within a short time. 9 Ibid., Exhibit A, p. 4. 10 Ibid., p. 7. 11 Ibid., p. 7. 12 Terman to Sterling, 12 July 1954, Sterling Papers, SC 216, Box 15, fol 6. Specific details of the agreement can be seen in the contract between GE and Stanford establishing the conditions of their cooperation: Terman Papers, SC 160, Series II, Box 18, fol. 6: http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIBox18/fol6/GE-StanfordLegalAgreement.pdf 13 John G. Linvill, Proposed Research in Solid-State Electronics, 5 February 1960, Terman Papes, SC 160 Series III, Box 18, fol. 1, p. 2. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox18/fol1/Linvill-ProposedResMicroelectronics.pdf 14 Ibid., pp. 3-4. 15 See Terman’s description of the strategy, “Proposed Budget for Funds from Industrial Associates of Stanford University in Solid State Electronics,” Terman Papers, SC 160, Series III, Box 18, fol.1. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox18/fol1/PropFundsIndustrialAssociates.pdf 16 Linvill to Shepherd, 10 September 1958, Terman Papers, SC 160, Series III, Box 18, fol 1. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox18/fol1/Linvill-Shepherd10Sept1958.pdf 17 In a memo to Terman, Pettit and Skilling, Linvill, who had started his career at MIT, emphasized that the difference between the Stanford Associates Program and the MIT Industrial Liason Plan was that the effectiveness of the MIT plan was diminished by the large number members. See Linvill to Terman, 18 February 1959, Terman Papers, SC 160, Series III, Box 18, fol 1, p. 3.

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http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox18/fol1/Linvill-Terman18Feb1959.pdf 18 Terman to Jacobson, 2 June 1958, Terman Papers, SC 160, Series III, Box 18, fol 1. http://www.stanford.edu/dept/HPS/TimLenoir/Startup/TermanPapersSC160/SeriesIIIBox18/fol1/Terman-Jacobson2Jun1958.pdf 19 While Terman was widely celebrated for the transformations he brought to Stanford, his efforts were not without their critics. In particular some urged that the Stanford industrial park was exclusively occupied by electronics companies working on military contracts. A committee of the Board of Trustees urged that efforts be made to diversify the types of companies in the industrial park, and especially to seek the location of the executive offices of national professional societies in the industrial park. See Advisory Committee on Land and Building, Minutes of the Committee, 9 November 1959, Section 7. Diversification of University Support in the Land Development Program, in Terman Papers, SC 160, Sec III, Box 35, Fol. 2, Land and Building Development 1959.

Quarterly Reports Lécuyer First Quarter Progress Report Christophe Lécuyer History Department January 8, 2002

What role did Stanford’s school of engineering play in the rise of Silicon Valley? How did Silicon Valley shape engineering at Stanford? These are some of the questions that informed my research over the last few months. To examine these issues, I did a broad survey of the Frederick Terman Papers in the Stanford archives. I conducted interviews with academic administrators such as Jim Gibbons. I also started in depth studies, concentrating on three sites: professional education, the Center for Integrated Systems, and H-P’s relation to Stanford (for a detailed treatment of these case studies, see below). Stanford engineering and Silicon Valley

Much has been written about Frederick Terman and his efforts to build the school of engineering and link it to Silicon Valley. Of particular interest is the work by Stuart Leslie. Leslie argued that Terman built strong research groups in electronics engineering and materials science with military patronage from the late 1940s to the mid-1960s. According to Leslie, Terman played also a critical role in the establishment of the electronics manufacturing complex on the San Francisco Peninsula. He encouraged Stanford’s engineers to establish new corporations in the area. Terman also persuaded East Coast firms such as General Electric to build research laboratories in the vicinity of the University. My research confirmed much of Leslie’s argument and particularly his thesis about the role of the military in the rise of the engineering school and more generally the university as a whole.

Leslie’s argument on the Stanford-Silicon Valley relationship, however, is in need of revision. At the outset, it might be useful to dispel the myth that Stanford was the source of Silicon Valley. Stanford did not create the Valley – far from it. Silicon Valley grew out of the area’s amateur radio community in the first three decades of the twentieth century. Partly because of its strong maritime orientation, starting in the 1900s and 1910s, the Bay Area was one of the largest centers for amateur radio in the United States. The local hobbyist community produced technologists and entrepreneurs who set up vacuum tube and radio system corporations – such as Heintz and Kaufman, Eitel-McCullough (Eimac), and Litton Engineering. In the post-war period, the electronics manufacturing complex on the Peninsula was shaped by subsequent groups of entrepreneurs and technologists in semiconductors and computing. These groups came from the East and had, at first, little to do with the university.

How can one understand Stanford’s relations with Silicon Valley during the Terman years? I would like to argue that electronics firms on the Peninsula were critical for Terman’s disciplinary and institutional strategies. An important aspect of these strategies was the building of research and teaching programs in fields that had, until then, been the province of industry. Throughout his career, Terman consistently sought to bring into the university technological fields that had been exclusively cultivated in industry. Examples of these fields include tube design and processing (late 1930s-mid-1950s) and semiconductor technology (mid-1950s-1960s). Terman’s goal was to transform these fields into academic engineering disciplines. This involved the writing of textbooks, the building of well-equipped research and teaching laboratories, and the establishment of degree programs that included training in both practice and theory. Another key aspect of Terman’s strategy was to apply this new found “competence” to pressing industrial and national problems. Terman’s approach to discipline and institution building helped shape Stanford’s relations with Silicon Valley from the mid-1940s to the late-1970s. To build up their research and teaching programs, Terman and his faculty relied on the knowledge and skills of local corporations. Two firms, for instance, were critical for the establishment of Stanford’s tube and solid state programs: Litton Engineering and Shockley Semiconductor. Litton, the founder of Litton Engineering, was

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one of the best tube engineers in the nation. He was particularly expert in the high vacuum processing of power tubes. Terman relied very heavily on him to build up the university’s tube research and teaching programs. Litton taught courses on tube manufacturing in the late 1930s and early 1940s. He also trained young faculty members such as Spangenberg in tube technology. More importantly, Litton helped the electrical engineering department set up its own tube laboratory.

Similarly, Shockley Semiconductor played a crucial role in the establishment of the solid state program at Stanford. Jim Gibbons, then a young faculty member, was apprenticed to William Shockley to learn about the new technology of semiconductor design and processing in the mid- and late 1950s. Gibbons later brought this processing capability to the university and set up Stanford’s solid state laboratory. When the integrated circuit laboratory (ICL), a spin-off of the solid state laboratory, encountered difficulties making devices in the mid-1960s, it turned again toward Shockley Semiconductor. James Meindl, ICL’s director, hired an experienced engineer from Shockley, Jacques Beaudoin, to supervise the day-to-day running of the laboratory.

Once the university had built its own “competence” in tube, semiconductor, and electronic system technologies, Terman and other faculty members in the school of engineering sought to build mutually beneficial relations with the electronics industries on the San Francisco Peninsula (much of which had been established independently of the university). Terman and his acolytes helped set up new electronics corporations out of Stanford’s labs. They also attracted branch plants from East Coast corporations such as Sylvania and General Electric to the Palo Alto area. More importantly, Terman and his followers set up cooperative teaching and research programs with local firms. Skills, people, monies, devices, and contracts flowed from the university to industry and back again to the university. It is interesting to note, however, that Stanford built much closer relations with tube and instrumentation firms than with the semiconductor industry in the post-war period. The university was closely coupled with Hewlett-Packard in the 1950s and 1960s (see below). Tube firms (Varian Associates, MEC, Huggins, Litton Industries, Stewart Engineering) were also closely connected to the electrical engineering and physics departments in the late 1940s and the first half of the 1950s. These corporations relied heavily on Stanford-trained engineers. They commercialized Stanford innovations such as the high power klystron and various travelling wave tube designs. But they also gave the university sub-contracts and grants for tube research and offered technical advice to its research groups.

In semiconductors, Stanford’s contacts with local firms were much more limited. Fairchild Semiconductor and other local silicon manufacturers participated in the solid state affiliates program. Their yearly fees financed faculty positions in solid state at Stanford. But these corporations hired relatively few Stanford engineers (at least in the late 1960s and first half of the 1970s). They seem also to have had little to learn from Stanford’s solid state program, with the exception of the work on ion implantation by Gibbons and his group. Similarly, Stanford’s relations with the communication, computing, and disk drive industries seem to have been distant at best in the late 1960s and 1970s.

While the Terman years have attracted substantial scholarly attention, the history of the engineering school and its relations with Silicon Valley from the mid-1970s on is still terra incognita. Over the last two decades, the school experienced an intensification of its relations with industry and more specifically with Silicon Valley – in a variety of ways. The school of engineering became more dependent on industry (including local firms) for the financing of its research program. The school, which had functioned with military research contracts from the late 1940s to the late 1970s, increasingly turned toward industry in the 1980s. The main impetus for this reorientation was the declining Federal outlays for research in engineering and the physical sciences. Industrial grants and contracts, which represented a few percents of the school’s research budget in the late 1970s, grew roughly to 10% of its total research funding at the end of the 1990s. Much of this funding was funneled through new organizational mechanisms such as consortia. These consortia, which pooled funding from a number of industrial firms, supported several research groups. Examples of these consortia include the Center for Integrated Systems, the Stanford Institute for Manufacturing Automation, the Center for Telecommunications, and the Center for Photonics. These consortia and other forms of industrial patronage have had a substantial impact on the engineering school and its relations with Silicon Valley. They brought

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industry and its intellectual inputs into the university – to a degree then unknown at Stanford (see the CIS case study below).

The engineering school and more generally the university put also great emphasis on technology transfer in the 1980s and 1990s. Much of these transfers seem to have been directed toward Silicon Valley. There is also substantial evidence that intellectual property transactions administered by the Office of Technology Licensing (OTL) brought substantial benefits, in terms of relationships and licensing fees, to the university. More research on this topic might be warranted. It would be interesting, for example, to know what share of OTL revenues came from inventions made in the school of engineering. Of particular interest would also be a geographical analysis of OTL’s royalty revenues. What percentage of OTL’s royalties came from firms headquartered in Silicon Valley or with a substantial presence in the area? What were the relationships that intellectual property transactions helped build with local firms?

The school of engineering also experienced an entrepreneurial efflorescence in the 1980s and 1990s. Rare were the faculty and students who founded firms in the 1950s, 1960s, and early 1970s. This became a common place activity in the 1980s and 1990s. This seems to have been particularly the case in the electrical engineering and computer science departments (CS joined the school of engineering in the mid-1980s). Why did the engineering school experience this entrepreneurial flourish? It is likely that the licensing policies of the Office of Technology Licensing and the growing industrial presence on campus contributed to faculty and student entrepreneurship. Stanford’s growing strength in semiconductor, computing, and networking technologies must have also played a significant role. But it is likely that the driving factor for this entrepreneurial efflorescence was the resurgence of venture capital in the Valley in the late 1970s and the region’s entrepreneurial fever around personal computing, software, and networking and internet technologies during much of the 1980s and 1990s. Whatever its origins may be, the entrepreneurial impulse in Stanford engineering had a major impact on Silicon Valley (as it had never had before) in the 1980s and 1990s. Students and faculty members in the school of engineering established many corporations, including Cisco Systems, Sun Microsystems, Silicon Graphics, and Yahoo. These firms became major players in the Valley and established themselves as key suppliers of advanced workstations, routers, and internet-based services. The following case studies focus on specific aspects of the school’s relations with Silicon Valley. The first case study investigates a little known component of Terman’s institution building efforts, professional education. I also examine the Center for Integrated Systems (CIS). CIS provides an interesting window into the reorientation of the engineering school toward industry in the 1980s. Finally, I examine Stanford’s relation to Hewlett-Packard. Professional education

The history of Stanford’s educational programs for practicing engineers has not received the attention it deserves. Professional education may have been Stanford’s most significant contribution to Silicon Valley from the mid-1950s to the late 1970s. A preliminary investigation of these educational programs indicates that they were shaped by a variety of actors and forces: Terman and his efforts to build a top ranked school of engineering; the recruiting and educational needs of Silicon Valley firms; and, more importantly, the spatial expansion of the electronics manufacturing complex on the San Francisco Peninsula.

Stanford’s professional education programs found their origin in the educational demands of the local tube, instrumentation, and communication industries during the Korean War. In the early 1950s, Hewlett-Packard, Sylvania, and other electronics corporations on the Peninsula put considerable pressure on the university to set up evening programs in electronics for their rapidly growing workforce. At first, Terman resisted these demands on the ground that evening courses would provide an education of dubious quality and be detrimental to the school’s prestige. But, as the pressure grew intense, he allowed engineers working at local firms to take regular classes at the university on a part time basis. This proved to be a mistake. The university experienced a large influx of industrial students. These students far outnumbered regular students in most electronics courses. They proved also to be costly, as tuition did not cover the cost of their education.

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To solve these problems and at the same time serve the needs of local firms, Terman set up the Honors Cooperative Program in 1954. The Honors Cooperative Program was a clever scheme that satisfied Terman’s educational standards and his ambitions for the school and at the same brought substantial financial resources to the university. The Honors Cooperative Program was a graduate course of study meant to train the most talented research and development engineers in industry. Under this program, cooperating firms nominated employees for admission to the university. Stanford had theoretically the final say on their selection. But in practice, the university seems to have followed the firms’ recommendations. Students worked for 35 hours a week in industry and did regular class work at Stanford on a part time basis. They obtained a master’s degree in two years (they could also work for a Ph.D. degree). The program was particularly remunerative for the university. Industrial students paid double tuition. In addition to the regular tuition, firms paid a matching fee of a similar amount to the university. In order to ensure a steady income stream, Stanford instituted a quota system whereby each firm had to commit itself for a specific number of units over a period of five years. These steady revenues helped the school of engineering create twenty faculty positions between 1954 and 1974.

It is not clear how the Honors Cooperative Program was received at first in industry. It is known however that Hewlett-Packard, the Stanford Research Institute, and the local branches of Sylvania and the General Electric company were the first firms to participate in the program. Within a few years, the program attracted a substantial number of electronics and aerospace firms in Silicon Valley. Tube and instrumentation corporations seem to have been particularly active in the program. By the early 1970s, more than thirty firms sponsored honors cooperative students. Corporations embraced the program for a number of reasons. They saw it a way of giving graduate training to their most promising employees. More importantly, corporations used the Honors Cooperative Program as a recruiting tool. During most of the 1950s and 1960s, local firms had difficulties attracting the most talented college students. The Peninsula was geographically distant from major industrial and urban centers. More importantly, electronics corporations in the Bay Area did not have the prestige of the IBMs, GEs, and RCAs they were competing with for skilled manpower. To mitigate their recruiting disadvantage, Hewlett-Packard and other firms offered a place (and free tuition) in the Honors Cooperative Program to the engineering seniors they most wanted to recruit. According to David Packard, this proved particularly effective in upgrading the quality of H-P’s engineering workforce. By 1974, the program had delivered 1500 graduate degrees to practicing engineers on the Peninsula.

The rapid growth and spatial expansion of the electronics industry on the Peninsula in the 1960s led to another educational innovation, the Stanford educational television network. The densification of the Palo Alto area and the building of electronics plants in Santa Clara and San Jose made daytime course attendance increasingly difficult for most industrial students. Much of their time would be spent in commuting from their place of employment to the Stanford campus. Instead of teaching special evening courses, the engineering school (under Terman’s close watch) set up a low power television network to meet the needs of industrial students. This network was based on the model of the continuing education program at the University of Florida. The network broadcast Stanford’s regular courses to corporations located from San Francisco to San Jose. This network was financed by an additional fee from the participating companies. It permitted Honors Cooperative students to attend Stanford classes from their place of employment. The network also helped the university broaden its educational offerings at very little cost. In addition to the Honors Cooperative students, Stanford also offered the television courses to auditors and non-registered students (who might not have met the school’s admissions requirements) at participating companies. These offerings seem to have been particularly popular and brought in substantial revenues to the university. By 1973, 2000 engineers in industry were taking Stanford courses through the television network.

In turn, the television-based program led to new educational experiments such as tutored videotape instruction in the early 1970s. The main impetus for this innovation came again from industry. Hewlett-Packard relocated some of its research and production facilities to Santa Rosa in 1972. The company wanted to give the same educational benefits to its Santa Rosa employees as those on the Peninsula. But Santa Rosa was outside of the range of Stanford’s transmitter. To meet the educational needs of Santa Rosa engineers, Gibbons developed new teaching techniques. This new form of instruction rested on the use of videotapes. Regular lectures

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transmitted by the television network were videotaped. These videotapes were then discussed by small groups of engineers under a tutor’s guidance (the tutor was also an H-P employee). This means of instruction proved particularly effective. Based on the Santa Rosa experiment, the electrical engineering department established similar programs at H-P’s plants in Idaho and Southern California. The program was also adopted by other Silicon Valley firms that wanted to use Stanford’s engineering courses in various parts of the country and in their foreign operations. In other words, Stanford’s professional education programs (not unlike other suppliers of specialized goods and services) followed Silicon Valley firms in their geographical expansion in the 1960s and 1970s.

Center for Integrated Systems The second site that I am focusing on is the Center for Integrated Systems (CIS). This center provides an excellent window into the transformation of the engineering school and its relations with Silicon Valley in the 1980s and early 1990s. CIS pioneered joint, pre-competitive research with industry. This provided the model for other industry-oriented research consortia at Stanford such as the Stanford Institute for Manufacturing Automation, the Center for Telecommunication, and, more recently, the Center for Photonics. CIS was also at the heart of the entrepreneurial efflorescence in the engineering school in the 1980s and early 1990s. Faculty and students affiliated with the center established Silicon Graphics, MIPS, Rambus, and Yahoo (among others). More importantly, the Center for Integrated Systems produced the school’s leadership. Jim Gibbons, John Hennessy, and Jim Plummer, three key figures in CIS, successively directed the school of engineering. Hennessy later became provost and university president. My research so far has concentrated on the formation of CIS. In the late 1970s, key members of the electrical engineering faculty, Gibbons, John Linvill, and Jim Meindl joined hands to establish a research center around the new technology of VLSI. This center was to be composed of three already existing laboratories: the solid state laboratory, the integrated circuit laboratory, and the computer systems laboratory. Gibbons’, Linvill’s, and Meindl’s goal was to build a multidisciplinary research center that would mesh the cultures of semiconductor processing, circuit engineering, and computer science. They also sought to build a state of the art fabrication facility for VLSI chips – the first one of its kind of academia. They reasoned that this processing capability and the multidisciplinary environment would help tackle the complex problems attached to VLSI technology. This competence would attract generous funding from the Department of Defense and especially DARPA, as the Federal government was getting increasingly concerned by the growing strength of the Japanese semiconductor industry. This project rapidly mutated under the influence of Silicon Valley industrialists. The planning group discovered that the Federal government would not cover the expense of the construction of a new building for the wafer fab. They would have to look for other sources of funding, especially in industry. As a result, Linvill, Meindl, and Gibbons apprised William Hewlett, a long standing supporter of the school, of their project in 1979. Hewlett, who was deeply concerned by growing strength of Japanese firms in electronics, saw in the proposed center an opportunity to bolster the long-term competitiveness of the US semiconductor industry. He proposed that the center perform pre-competitive research on VLSI in collaboration with a consortium of US corporations. Hewlett envisioned the center as a neutral ground where US firms could cooperate on long-range research projects and jointly develop innovative semiconductor technologies. He also suggested that industry finance the construction of the new building. It took three years for Linvill, Meindl, and Gibbons to raise industrial monies for the new building and iron out the operating procedures of the new center. Hewlett greatly supported these fund raising efforts. He instructed John Young, H-P’s CEO, to chair a fund raising committee for CIS. Young’s active involvement proved decisive. Young, Linvill, Meindl, and Gibbons convinced seventeen firms to give $750,000 each for the new building between 1980 and 1982. These firms included Texas Instruments, General Electric, IBM, Intel, Fairchild, Motorola, and Xerox. These corporations funded CIS for a variety of reasons. Many were deeply concerned by Japanese competition and were interested in doing joint pre-competitive research in VLSI. Others saw the

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Center as a source of skilled manpower. Finally, some corporations viewed CIS as facility where they would process their own custom circuits.

As the fund raising proceeded, the CIS leadership, top academic administrators, the board of trustees, and industrial firms negotiated the center’s policies – especially those pertaining to the university’s and the sponsors’ respective rights and obligations. Of particular concern were the role of industrial sponsors in the direction of research projects, access to graduate students, and intellectual property rights. Regarding these matters, Meindl, Gibbons, and Linvill had to walk a fine line between the trustees who were concerned that the university was prostituting itself and the sponsoring corporations that wanted results for their money. The compromise solution was that the Center for Integrated Systems would facilitate access to its research through bi-annual meetings, the distribution of pre-prints, and, for an additional fee, long term visits by industrial researchers. The Center set up a “sponsors’ advisory committee” which advised the faculty as to the center’s long-term research orientations. CIS also hired a director of career development who recruited the most promising applicants for graduate study in the electrical engineering department and put graduate students in contact with the sponsoring companies. A program whereby Stanford students visited industrial plants was also instituted. Finally, Linvill and Meindl managed to raise an additional yearly fee of $100,000 from the sponsoring companies. It was the issue of intellectual property rights, however, that proved the most difficult to solve. After three years of negotiations and again under strong pressure from H-P, the sponsoring firms agreed that the research supported by their fees would be in the public domain. Inventions from projects supported by the Federal government would be handled under the university’s standard patent policies.

As academic administrators and industrial managers negotiated the center’s basic policies, faculty members affiliated with CIS attracted substantial research funding from DARPA, various DoD agencies, the National Institutes of Health, and the Semiconductor Research Corporation. A grant from DARPA’s VLSI program also funded the purchase of an e-beam machine and other state-of-the-art processing equipment. The rest of the equipment was donated by semiconductor firms and equipment manufacturers. Interestingly, the center’s close involvement with industry helped it with funding agencies in the Federal government. Federal agencies were interested in the center’s close alliance with industrial corporations. DARPA, for example, saw these industrial contacts as critical to its goal of accelerating semiconductor innovation and transferring research findings from academia to industry. Intellectual inputs from industry also helped Stanford faculty put together better and more convincing proposals to the Federal government – which, in turn, contributed to them getting funded.

The innovative output of the Center for Integrated Systems surpassed its founders’ wildest dreams and put Stanford on the map as a major center for semiconductor and computer research. Faculty and students affiliated with the center made important contributions to semiconductor processing, process simulation, manufacturing integration, and computer architecture. Among their most notable accomplishments were SUPREM, a processing CAD tool, RISC architecture, the geometry engine, and new concepts in manufacturing integration. My goal is to examine some of these projects more closely. I am particularly interested in investigating the forces and dynamics that led to this burst in creativity. I want to investigate the role of industrial inputs (especially from the sponsors’ advisory committee and visiting industrial scientists) in the definition of research problems and in actual work itself. According to the VLSI project manager at DARPA, these intellectual contributions were substantial. I am also interested in examining the ways in which various research groups affiliated with CIS used the state-of-the-art processing facility and the extent to which this processing competence supported and reoriented their projects.

Another aspect of my research is to examine the commercialization of the chips, software tools, processing and design ideas developed in CIS. My goal is to investigate the following questions: What innovations were commercialized? How were they commercialized? What role did visiting industrial scientists and graduating students play in the transfer of ideas, devices, and techniques from the university to industry? What function did Stanford’s Office of Technology Licensing play in this process? What were the firms that benefited the most from CIS innovations? Where were these located? What was the center’s impact on the long term health of the US semiconductor and computer industries? At this stage, some patterns can be identified. It

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seems to me that process innovations and processing simulation tools developed by CIS researchers diffused through much of the US semiconductor industry – through visiting engineers, students, and publication, and conferences. On the other hand, the commercialization of RISC technology developed at CIS and the University of California, Berkeley was highly localized. Stanford spin-offs such as MIPS and Silicon Graphics were among the first firms to exploit the new technology. Hewlett-Packard and Sun Microsystems also became major manufacturers of RISC-based systems.

Stanford/Hewlett-Packard The third case study examines the relations between the school of engineering (and more generally the university as a whole) and the Hewlett-Packard company. As the previous cases made it clear, the school of engineering developed very close relations with David Packard, William Hewlett, and their company. Indeed, of all firms in Silicon Valley, Hewlett-Packard was the corporation that built the closest ties to the university and the most consistently made use of and supported its research and teaching programs. In this study, I am interested in investigating the circumstances and forces that led to the close coupling between Stanford and Hewlett-Packard. I also want to analyze the impact that Hewlett, Packard, and their corporation had on the school of engineering and the university. Conversely, my goal is to examine Stanford’s substantial contributions to the company. Three periods can be distinguished in Stanford’s long standing relationship with Hewlett, Packard, and their corporation. In the period 1932-1946, these relations were dominated by the close personal ties between Terman and his students, Hewlett and Packard. As Packard and Hewlett often later pointed out, Terman introduced them to the field of radio engineering. He also played a critical role in H-P’s formation and the early growth of the firm. Through class trips to small electronics firms on the Peninsula, Packard exposed Hewlett and Packard to entrepreneurship. He also brought them back to the West Coast and convinced them to go into business for themselves. But Terman’s contributions went further than that. They were also technical and business related. When Hewlett was looking for a thesis topic for his graduate degree, Terman suggested that he work on an idea of his (Terman’s) on oscillator design. This instrument became Hewlett-Packard’s first product. Terman gave the two entrepreneurs access to his communication laboratory and its instrumentation (in return, Hewlett and Packard were asked to help supervise graduate theses). Terman also provided them with key contacts to banks, local entrepreneurs, and potential business partners in the East. For example, he introduced Packard to Charles Litton who soon became Packard’s business mentor. Terman also arranged a meeting between Hewlett and Packard and Melville Eastham, the founder and president of the General Radio Company. General Radio was a highly successful electronic measurement company located in Massachusetts. Through Eastham, Hewlett and Packard gained access to key General Radio patents. Eastham also advised the budding entrepreneurs on how to build and manage an electronic measurement instrument business. H-P was to a large degree modeled after General Radio. Finally, Terman opened up new lines of business for Hewlett-Packard. When Terman headed the Radio Research Laboratory at Harvard during the war, he placed an important production contract for a microwave signal generator (developed at the RRL) with the Hewlett-Packard company. This started the firm’s extensive microwave instrumentation line. Terman’s relations with Hewlett, Packard, and their company changed substantially in the post-war period. The 1950s and 1960s were a time of rapid growth for Hewlett-Packard. H-P became one of the largest and most profitable electronics firms on the San Francisco Peninsula. Partly as a way of thanking Terman for his help in the late 1930s and early 1940s, Hewlett and Packard actively supported his institution building efforts in the school of engineering and later the university as a whole. They acted both as patrons and trustees of the university. Hewlett and Packard partly funded the construction of the electronics research laboratory building in 1950. They also gave graduate fellowships in the 1950s. Their firm financed Stanford’s programs in solid state. H-P was also one of the first participants in the Honors Cooperative Program.

But it was probably as university trustees that Hewlett and Packard made the largest impact at Stanford in the 1950s and 1960s. Packard became a Stanford trustee in 1954. Four

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years later, he was elected chairman of the board, an office he held until the early 1960s. Similarly, Hewlett was a trustee from 1963 to 1974. Little is known about Packard’s and Hewlett’s tenure in the board of trustees. It is clear however that Packard was the primary supporter of Terman’s Honors Cooperative Program on the board. Packard was also actively involved in the move of the medical school from San Francisco to the Stanford campus. He was a strong supporter of the Stanford Research Park. Packard relocated H-P to the Research Park. He also actively seconded the university’s efforts to muster the City of Palo Alto’s approval for the Park and recruit industrial tenants. Finally, Packard and H-P executives raised funds for the school of engineering in the 1950s and 1960s. For example, Packard persuaded electronics firms located on the Peninsula to join the solid state affiliates program. He was instrumental in securing large gifts from local industrialists. Packard also helped increase corporate gifts to the university from $500,000 in 1955 to $4 million in 1965.

Hewlett’s and Packard’s active involvement in the school’s affairs was not selfless. They may have expected and certainly derived substantial commercial benefits from close relations with the engineering school. The firm received sub-contracts from the university for electronics countermeasure equipment. It used microwave tubes developed in Stanford labs in its measuring instruments. In the 1950s, H-P also commercialized several instruments engineered at the university. Hewlett and Packard probably also viewed the university as a testing ground where they could learn and explore new technologies. In 1954, H-P gave a graduate fellowship in medical electronics. A few years later, the firm entered this field and introduced medical instruments to the market. A similar pattern can be identified in semiconductors. H-P joined the solid state industrial affiliate program of the electrical engineering department in 1956. It later set up its own semiconductor corporation (H-P Associates).

More importantly, Hewlett and Packard viewed Stanford as a critical provider of trained electronics engineers. Indeed, they viewed the employment of Stanford engineers as a critical source of competitive advantage. H-P also used Stanford’s Honors Cooperative Program as a recruiting tool. As a result of heavy recruiting from Stanford and its active involvement in the Honors Cooperative Program, Hewlett-Packard became (and remain to this day) the largest employer of Stanford engineers in Silicon Valley. Packard’s strong commitment to the Research Park can also be interpreted in a similar way. It was in his interest to attract new electronics firms to the Palo Alto area. These firms would enlarge the local labor pool, attract specialized suppliers, and bring new competencies to the area. In other words, they would enrich the industrial district and bring long term benefits to the company.

Student unrest in the late 1960s opened up a new phase in Stanford’s relations with Hewlett, Packard, and their company. Student demonstrations in front of H-P’s headquarters and the fire bombing of Hewlett’s house alienated Hewlett and Packard from the university. As student protests subsided, the entrepreneurs operated a rapprochement with the university and regained their influence on campus. H-P executives, such as John Young, joined the board of trustees. Hewlett played a critical role in the formation of CIS. More importantly, Hewlett and Packard emerged as the university’s most generous patrons. The entrepreneurs and their foundations gave more than $350 million to the university from the late 1970s to the late 1990s. These gifts deeply altered the university’s physical plant and permitted the expansion of its engineering and science programs. Hewlett’s and Packard’s monies supported the construction of new buildings (such as the Terman building), the erection of the science and engineering quad, the endowment of new professorships, and the establishment of a research grant program for junior faculty.

Quarterly Reports Rosenberg/Colyvas First Quarter Report 3 January 2002 Nathan Rosenberg Professor, Economics Department Jeannette Colyvas Graduate Student, School of Education Report to Dean Kruger on Stanford’s Interface with Silicon Valley (end of first quarter of project, September-December 2001). Overview We have been working toward an analysis of the innovative output of Stanford University, with a special focus on the role of the Academic Medical Center. The reason for this focus is straightforward. Data on the patenting and licensing activities of all American universities identifies a recent institutional development of great economic and, more generally, human significance: the AMC is now the dominant contributor, within the university research community, to technological innovation. “In 1970, one-eighth of the patents issued to universities were for biomedical inventions; by 1990, the percentage had doubled...Presently, over sixty percent of all university licences are based upon biomedical inventions...” [AUTM Survey 1999. ”Biomedical” is here defined to include medical devices]. With respect to Stanford, the AMC is already known to be the dominant source of patent royalties. Indeed, only a few years ago, four of the top five (cumulative) patent revenue earners at this university came from the medical school (and the top 4 medical patents constituted, by themselves, well over half of all Stanford patent revenues). But it is our purpose to go beyond this rather stark overview. Using patent data, we intend to develop, for the University as a whole, a much more detailed picture of the specific sources of innovative activity. Moreover, although we will, necessarily, rely heavily on data collected by the OTL on inventive activity, patents, and revenues generated by these patents, we are also attempting to go beyond the limits of patent data. In order to develop an enlarged sense of how AMC inventions have contributed to improvements in health care in ways that are not adequately reducible to measures of patent royalties. For example, we have been conducting several case studies. One of these studies, the fluorescence-activated cell sorter, developed by the Herzenberg Lab, has created an entirely new research field called “flow cytometry” and has made a major contribution to what is potentially one of the most important medical breakthroughs of recent decades: monoclonal antibodies. We have already done considerable work on Stanford’s contribution to the CT scanner which, as near as we can determine, has been almost entirely neglected.

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Patent Data Our main efforts, so far, have involved organizing the patent data base in ways that will make it possible to address more specific issues: We have been pulling information together into a “relational” database that, in the first phase, would allow us to connect the dockets (inventions), invention title, inventor(s), department(s), school(s), and income generated by year, with grand totals. This information is available in various formats at the OTL. However, it does not exist in a unified form that goes back to the inception of the OTL with links to all the variables that we will need for our analysis. We have been spending a good deal of our time in the first phase in compiling all this information into a database that makes use of the various sources available at the OTL: scanning hard copies of reports documenting this information, merging different databases and sources from different software applications, and setting up the relational database to run the queries that we would need for our analysis. a. For example, we need to merge an old excel file listing revenue income and dockets by year (but with no inventors or departments) going back to 1969, with a more recent “4-D” database that has 1996-present dockets, including departments, but not inventors, etc... b. We will then need to collapse some of the department categories, since they are compiled at the OTL by “accounts receivable” which roughly corresponds to a department, but not always, and is listed with a significant amount of duplication of department and school. Our goal is to be able to provide an understanding of the innovative output based on this first phase of data collection. This first phase would enable us to establish exactly where and from whom these outputs are coming, who are the main contributors over time, and how that has changed. In other words, this would give us a measure of innovative output that will allow us to establish the relative importance of the various contributors. In the case of the AMC, this will enable us to establish the position of the AMC, as well as individual departments, and put this information into the larger context of the broader university. Where, more precisely, are the innovations coming from? Where, within the AMC, are the locations of its main inventive sources? To what extent are the main sources of inventive activity the same as the sources of licensing activity? How closely, in turn, are these the same as revenue sources? With respect to the main inventions, to which locations within the university are they connected in some form of interdisciplinary collaboration? We would anticipate multiple ties to certain areas of engineering, but also to joint inventive activity within the AMC itself. But at the present stage this is little more than speculation. Ultimately, we plan to organize the information that we have collected in ways that will enable us to characterize the firms and industries that have drawn upon Stanford’s inventive activity, and with what eventual outcomes.

Quarterly Reports Rowen and Sheehan First Quarter Report INTERIM REPORT: THE GSB AND SILICON VALLEY Henry S. Rowen and Rebecca Sheehan January 17, 2002 This report is on the interactions between the Graduate School of Business and Silicon Valley. Over the past few months, we have made a number of inquiries into the GSB’s curriculum, its faculty, alumni, and the services of the School as they bear on entrepreneurship. We have also asked about how the Valley’s firms and executives affect or are involved in the School’s research and teaching. We have (so far) interviewed 11 current Faculty members and several staff members as well as examined data about alumni. In particular, we have been examining the impressive entrepreneurial resources of the School. Among these are the Center for Entrepreneurial Studies, Cases, search funds, and job and summer fieldwork databases accessible only to GSB students. We have interviewed alumni coordinators in the GSB alumni affairs office and used the Wellsprings of Innovation website as well as the GSB Alumni Survey prepared by Stanislav Dobrev under the supervision of Professor William Barnett in June 1998. We want to express our thanks for the cooperation of faculty and staff of the GSB. Everyone we have approached has been very helpful. Naturally, none of those interviewed is responsible for the inferences reported here. This interim report has not been checked with those interviewed but the final report will be before publication. In an effort to understand how the evolution of the GSB has affected its relationship with firms and individuals in Silicon Valley, we have put it in an historical context. One crucial factor was the attitude of President Wallace Sterling towards the School in the 1950s. Another major influence in the rise of the School’s national standing, as well as an important determinant of the values it continues to hold today, is the Ford Foundation’s Gordon-Howell Report of 1959. The Report critically assessed the School’s weaknesses and made crucial recommendations for its improvement. Conversations with James Howell, as well as an interview with him conducted in 1984 by Selections magazine, have provided a valuable perspective on the philosophy that shaped today’s School.

The Several Kinds of University-Business Interactions

We take a broad view of the concept of “interactions.” In the outward direction, that is from the University to industry, it includes ideas originated by faculty and students that result in new products and new companies and teaching that bears directly on the technologies and practices in the Valley, including on entrepreneurship, a distinguishing feature of the local economy. In the inward direction, that is from industry to the university, are technologies, business practices, ideas for research, lecturers and consulting professors, opportunities for consultantships for faculty, and access to material in companies useful in teaching, including cases, internships and summer jobs for students, And, not least, is money in the form of gifts.

Some Distinctions and Questions about Causation and Data Distinctions have had to be drawn on the boundary of this investigation, not all of them easy to make. One is the definition of “Silicon Valley,” given that the University’s research and teaching activities are not circumscribed by geography. If, for example, a GSB student or recent graduate founds a computer company in Taiwan that has significant operations in Silicon Valley, it might be a stretch to record it as a Silicon Valley startup, although it would qualify as a case of high tech entrepreneurship with a Valley presence. Our method for dealing with such distinctions is

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decidedly non-rigorous. We are looking for local interactions and if we record some that aren’t quite that, so be it. We believe that most of our data will fit. Another problem is defining a “Stanford” startup or product given that most companies and ideas for products have multiple sources. For example, an exercise in which the market value of companies that have Stanford faculty and graduates among their founders added to one on the market value of companies with MIT faculty and graduates would produce an over count (with some founders, such as David Packard having attended both institutions). Another is causation. For example, does the high level of entrepreneurship exhibited by GSB graduates during the 1990s reflect changes in the School, changes in the character of the students, or increased opportunities in the Valley? We guess that it is some combination of these. Although we record changes in the School during this period we are unable to sort out these influences satisfactorily.

There are data problems as well as definitional ones. Despite some useful sources, much is unrecorded, or at least records are incomplete and widely scattered. One useful source is the Wellsprings of Innovation Project which has assembled data on the companies founded by Stanford graduates but, as noted below, it has limitations. Another source is a recent alumni survey. By comparison with the work of our colleagues who are examining the Engineering and Medical Schools and the Office of Technology Licensing, it seems that we are dealing for the most part with less tangible influences. They can often identify some item of technology (e.g. reduced instruction set computing) and a company (e.g. MIPS technologies) with a professor (John Hennessey). Although some such identifications are possible for the GSB faculty, most of the School’s influences in the Valley have been through the activities of former students (and some while they are in residence). Because students are transient, it is a challenge to identify their roles and, especially, the factors that have influenced them – aside of course from such stars as Scott McNealy and Vinod Khosla, two former MBA students who were among the founders of Sun Microsystems.

The -- Tentative -- Main Findings A very short version of the story is that the School was transformed after the 1950s to being a widely acclaimed analytical powerhouse and that this transformation posed an obstacle for its ability to address the highly entrepreneurial types of Silicon Valley firms. However, after the mid-1980s, the School made a major effort to do this with considerable success. By 2000, the GSB had carved out a strong competitive position among business schools in research and teaching on high tech entrepreneurship. To gain a reasonable understanding of the relationship between the GSB and Silicon Valley one needs to consider the history of both. First, we present a short history of relevant aspects of the evolution of the School from the 1950s to 1980 and then how the School became more engaged with the Valley.

The Transformation of the GSB To go back no further than the 1950s, the GSB was a small and not especially distinguished business school. As was the norm in business schools of that era, the curriculum was largely focused on business practices with not much attention to the underlying disciplines in economics, psychology, organizational behavior, operations research, etc. President Sterling was not happy with its condition. He sought a broader intellectual base, fewer specialized courses, and restoration of a course on business policy that had been dropped under Dean Jackson. He also wanted an executive education program.

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Little happened until after the retirement of Dean Jackson in 1956 when, after an interval of searching for the right person, Ernie Arbuckle was appointed Dean in 1958 to be an agent of change. Sterling became aware that the Ford Foundation, which had gained a reputation as a judge of business school quality, estimated that of business education at Stanford as quite low. Ford was engaged in a far-reaching effort to improve American business education and Ford’s leading academic advisor, George Leland Bach, was blunt in expressing to Sterling that Stanford’s Business School was retrograde and needed upgrading. Ford, as part of its effort, had undertaken a study, the David Gordon- James Howell Report, published in 1959, that criticized traditional business curricula as having too much coursework that was merely vocational. Graduates were not being given a capacity to deal with the changing environment of business externally, the ability to think analytically, or the organizational skills with which to innovate. The report called for business schools to give students a higher degree of analytic ability. It was widely read because it carried with it the authority of the Ford Foundation – and because the Foundation had a lot of money to hand out. Both Howell and Bach soon joined the GSB faculty to lead the renovation and in the 1960s, Stanford changed along the lines of the Gordon-Howell report. It added courses on Economic and Mathematical Analysis as well as Human Resource Management, a thrust that led as a by-product to downgrading the case-method model that had been central to its curriculum, as indeed to those of other business schools. Ford also made a large challenge-grant gift that was successfully matched and that gave the GSB a competitive edge. (Having Howell join the faculty had enhanced its standing with the Foundation.) Under this team, faculty quality was rapidly upgraded and there was a much greater emphasis on research. This thrust continued under Arbuckle’s successor Arjay Miller, and the School’s reputation continued to climb. The extent of the transformation is dramatically illustrated by the fact that three Nobel prizes in Economics have been awarded to GSB faculty members, more than to any other business school or to any economics department other than that of the University of Chicago. The school became strongly nationally-oriented in outlook. For example, a strong and popular field was investment banking, an activity centered in New York. Many students were interested in general management and, on graduation, many went to consulting firms where they had a kind of post-MBA training. Some were interested in small business, but for a long time not especially of the high tech kind in Silicon Valley. Throughout, California was a strong magnet for graduates but for the attraction was not especially high tech industry until into the 1980s and beyond. The School, as do all business schools, has always faced a challenge in teaching the skills of general management entrepreneurship. While these holistic topics are, of course, informed by the disciplines, they do not fall neatly into any of them. So there is a necessary recourse to conveying certain themes deemed by the faculty to be important through the medium of actual business experiences; i.e. through cases, with the participants in these cases often brought into the classroom. (One view expressed to us on teaching entrepreneurship is that it is not done but rather that the aim is to demystify the topic.) There is a related difficulty with doing research on entrepreneurship, the problem of getting data. Junior faculty members try to make their mark through various combinations of theory and data analysis. Large firms generate many kinds of data: financial, human resources, logistic, marketing, pricing, etc. Large firms are complex and the GSB has a comparative advantage in dealing with complexity. New, small firms do not generate as much data, or it is much more difficult to capture for several reasons, including the fact that many of them disappear. (There are, however, some exceptions: James Baron and Michael Hannon have interesting research human resource findings on small firms, Porras and Collins have written on rapidly growing ones, and Pfeffer on organization theory and building cultures.) Small firms are better suited to the use of cases for teaching but developing cases has not generally been a path to tenure. It is true that some distinctive institutions have developed in association with high tech startups, notably venture capital, and these have become the object of growing amounts of research.

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By the 1980s, the GSB was in a small set of leading business schools with a reputation for academic rigor, research production and excellence in teaching. The transformation from the 1950s had been dramatic.

Silicon Valley and the GSB

Over time, Silicon Valley grew steadily in size and significance for the American economy and by the 1980s had become a major center of economic activity, one specialized in character. It became the world’s leading center of information technology companies and of biotechnology ones. Some local firms grew quite large, e.g. Hewlett Packard and Intel, in a setting marked by technological dynamism with the formation of many new firms, the rapid growth of some and the disappearance of others through mergers and failures. There also evolved a supporting infrastructure essential to sustaining this system, including a venture capital industry. Then during the 1990’s there emerged the Internet and a new set of business opportunities in e-commerce. Although there was a necessary core of technology advances and of technology companies enabling this advance, the novel opportunities in the latter half of the 1990s were in the delivery of new services electronically. Although MBA’s could play an important role in the earlier (and still prominent) technology-based kinds of companies, they were often at the center of e-commerce ones based on new business models. An issue that increasingly faced the School in the 1980s was how to react to the growing significance of what was happening in its backyard, the Valley. Early acknowledgment of an important Silicon Valley institution was the offering of the first course in venture capital in the US in 1979 by Pitch Johnson, an experienced VC. But the kinds of research and teaching most relevant to this center of entrepreneurial activity were not strengths of the School (nor of other business schools either). Preceded by agitation on the part of some faculty members that more attention should be paid to the Silicon Valley phenomenon, a major shift occurred after the mid-1980s, under the Deanship of Michael Spence. A good measure of the change is the number of courses offered on entrepreneurship; in 1985 there were 2 or 3 such courses while in 2000/2001 there were 17. They comprise 30% of second year course-hours versus 19% earlier. (The GSB has not been alone in the university in offering courses on entrepreneurship; in AY 2000/2001 there were 31 quarter/semester-long courses (some of them parts of a multi-quarter sequence): 18 -- according to this source -- were offered in the GSB, 8 in the Engineering School, 3 in the Medical School, and 2 in the Law School. In the Engineering and Medical Schools especially, some of these courses also addressed creativity and innovation.) A signal event in entrepreneurial studies at the GSB was the formation of the Center for Entrepreneurial Studies in 1996 by Professors Holloway and Grousbeck with the mission of supporting research, curriculum development, and student programs on entrepreneurship and venture capital and the entrepreneurial activities of alumni and students. The programs and resources that were created include a Student Fieldwork Database on company requests for student help on business issues; summer internships with entrepreneurial companies; career counseling for students interested in entrepreneurial companies or wanting to start a company; entrepreneurship resource database on entrepreneurs, mentors, investors and service providers. During the 1990s, the school also began to advertise entrepreneurship as a specialty and acquired a reputation for it. Students increasingly thought of it as a laboratory and many 2nd year students became, in effect, “entrepreneurs in residence.” This was partly due to the Internet bubble that was based on business models and therefore gave more scope for MBAs than did technology companies. There was also a high demand for them. As of 2000/2001, a significant proportion of students went to consulting firms, investment banks, and big companies, following a

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long-established pattern but many more went to small, often startups. The biggest change over time is that 20-25% were going to small firms versus 5% in the past. It remains to be seen what the collapse of the dot-coms does to this job pattern. Case Studies Bearing on Entrepreneurship In 1987, the School hired the School’s first dedicated creator of high tech cases, Professor Irv Grousbeck, who believed that those from the Harvard School of Business, the standard source of cases for business schools, did not adequately cover the kinds of companies in Silicon Valley nor the demands of increasingly popular courses dealing with entrepreneurship. At the time of Grousbeck’s arrival, the School offered only 2 to 3 courses on entrepreneurship and that, at most, comprised 10% of a student’s coursework. Grousbeck’s prediction as to the rise in popularity of entrepreneurship courses has come true. The Business School added such courses as “Entrepreneurship and Venture Capital” and “Strategy and Action in the Information Processing Industry” in the nineties and today such courses typically comprise over 30% of a second-year student’s course units. Both courses address topics that are especially relevant to industries prominent in the Valley. In pursuit of furthering the interaction between the school and firms in the Valley, in 1996 Professors Grousbeck and Charles Holloway raised $20 million for the new Center for Entrepreneurial Studies (CES). Its mission is to support faculty research on this topic and to produce teaching cases; in short, to “increase the flow of ideas between those on the inside and those on the outside.” In a typical case, the subject’s biography will list a Stanford MBA, usually from the 1980s or early ‘90s. Many of these subjects were Professor Grousbeck’s first students and many went on to found their own companies. In Grousbeck’s estimate, 1/4 to 1/3 of cases written over the past 15 years relate to former students. Our findings reveal that, including those cases from 2001, the number relating to a business with a Stanford MBA from the 1980s or 90s as founder of having a substantial equity interest is quite possibly over 1/3. Some cases do not involve GSB graduates but those from other parts of the University, with a BA in fields ranging from Computer Science to Philosophy or a JD, MA, MS or PhD. Some, who were not MBA’s, such as Amazon’s Jeff Bezos, have become active in the School. In some instances, discussed later under the heading of the Wellsprings of Innovation, a business’s founders are GSB students or through cooperation among GSB and other Stanford students.1 These cases are about choices faced in starting or managing a business. The topics range from an owner’s responsibility to company’s employees, investors and customers when a project fails, to issues of company expansion and the reassignment of personnel. Course materials include articles and scenarios from business school newsletters and magazines that involve local businesses or articles that use a GSB alum as a subject. The kinds of companies cases treat are varied, although the incidence of tech companies and others in the information industry is quite high. Regardless of the type of company a Stanford case covers, its current location or the location where it was founded is almost always the Bay Area. Another commonality among businesses is that they are still small during the period any given case covers. Grousbeck touched upon this in an interview when questioned as to the overall intention of teaching cases, when he pointed out their usefulness in not only “demystifying the environment the students will find themselves in,” but also because they enable the magnification of a small company’s inner-workings and “problems that relate to larger companies are often easier to see in smaller ones.” These cases reflect the school’s world view, including that it has a comparative advantage in being in the Valley and can develop distinctive cases for its curriculum. For example, in 1999, Saloner and Spence offered a course on electronic commerce, one of the first in the country, and commissioned cases for it. (Because of their short half-life, they were offered free on the Internet.)

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Teachers from the Valley Having real life participants in cases present in the classroom is an ancient and valuable business school tradition. For the topic of this report, what is of particular interest is the role of Silicon Valley practitioners in teaching courses or modules of them. Some faculty members have been both active in business and in the School; Irv Grousbeck is prominent among them. The role of Pitch Johnson in pioneering the teaching of a course on venture capital has been mentioned. Some major figures from the Valley have taken on major teaching activities, notably John Morrgridge, the former CEO of Cisco Systems, who has co-taught a course with Professor Holloway, and Andy Grove who has co-taught a course with Professor Burgelman. In the case of Grove it is remarkable that for many years he did this while being CEO of the Intel Corporation. It is hard to imagine students getting closer than this to the high tech entrepreneurial action. Stanford Start-Ups: Data from Wellspring of Innovation We have found that of the 1631 founders listed as graduates of Stanford on the Wellspring of Innovation website, 379 hold an MBA from Stanford; many of these also hold Bachelors and or JDs or MDs from Stanford. There are, however, limitations to this information source that are described in this footnote.2 Nevertheless, it is interesting to note that GSB graduates who started a company within 1-4 years after graduating comprise the majority of the site’s listing for alumni from that School. The number of businesses established or presently located in the Bay Area is impressive as is the percentage of companies co-founded in the past couple of decades by alumni graduating in the same or nearby years from different schools or, more often, a group of GSB alumni from the same year. This speaks to the environment of cooperative thinking – the importance of teams -- and innovation encouraged among students, including those from Engineering, Biology, Medical and Computer Science. As Grousbeck has observed, “students come here and learn a lot from their peers and a little from the faculty.” One doesn’t know (at least we don’t) what incidence might be expected of companies founded by the faculty of one of the leading business schools in the country but, in fact, there have been few. Three have been reported to us: Bill Sharpe’s Financial Engines, a dot-com by Eddy Lazear and an educational service company by Paul Romer. GSB Faculty work tends to be generic. What Do Recent GSB Alumni Do and Where Do They Go? We have had the opportunity of examining the Alumni Survey conducted by Stanislav Dobrev in 1998 as well as Placement Results published by the GSB’ Office for Alumni Affairs. Our preliminary findings show that job functions for the first year after completion of an MBA first included “entrepreneurship” in 1990’s Placement Report with 3% of the graduating class indicating this as their job function. This percentage increased over the course of the nineties to 8% in 1994 (with the odd exception of 2% in 1997) to an outstanding 10% in 1999. The percentage reporting “Venture Capital” as a job function also steadily increased during the nineties following a pattern similar to the entrepreneurship showing. The Placement Report also reveals a large increase in GSB alumni remaining in the Bay Area after graduation, with 27% in Northern California in 1987 and 47% a decade later in 1997. The sharpest year-to-year rise in the percentage staying in the Bay Area seems to have occurred in 1990 when it moved from 25% to 35%. Other bits of data revealed in the Survey include an increase in respondents who report that they work part-time (with 3.6% in 1982 and 9.8% in 1997). We guess that they worked part-time because they were starting a company or were self-employed. The percentage of respondents who reported themselves as a “Founder” of a firm in their first year went from 12.6% for the class of 1992 to 15.9% for the class of 1997. Further Work to be Done As noted, this story is a tentative one. We doubt that it will be changed in fundamentals but some aspects of it are likely to be. We plan to do more interviews of faculty and staff and on the rich

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array of cases now available. We have not yet studied the Alumni Survey and are considering interviewing a sample of alumni. Another topic that remains to be addressed is giving to the School by successful entrepreneurs in the Valley. Endnotes 1 e.g. “Interactive Insurance Services,” a case which discusses a business seeking to facilitate the filing of on-line insurance claims and was started by Stanford MBA ’85, Stephen Aldrich and “a few of his friends” before they graduated. 2 The usefulness of this website in documenting Stanford’s role in fostering entrepreneurs is questionable, however, due to a methodology that limits itself to the self-reporting of businesses and their public listing, mostly web-based. This methodology may explain the high occurrence of e-commerce, software and hardware companies (ones especially visible to those using search engines or web-directories) and the high proportion of businesses listed in the Bay Area (ones perhaps listed in the most conspicuous directories or whose founders may be the most likely to self-report). It is also difficult to learn about the many companies that have gone out of business or offer no information readily accessible to the public. The site has little to say about change over a long time; nearly all the businesses listed were founded in the past decade, mostly by MBAs from the mid 1980s to the mid 1990s. We suspect that a combination of a change in the character of students attracted to the School, i.e more entrepreneurial types, and greater opportunities during the 80s and 90s accounts for this increase (a view advanced by some of the faculty members we interviewed. As the number of courses on entrepreneurship the GSB offered increased, and other entrepreneurial resources were made available to students, an above average percentage of graduates went on to found businesses shortly after graduation (or before in some cases).

Quarterly Reports Sandelin History of OTL Stanford University’s Office of Technology Licensing A report on its history, financial conditions, and success stories Commissioned by The Japan Research Institute, Limited Prepared by Jon Sandelin; Senior Associate; Stanford University Office of Technology Licensing; jon.sandelin@stanford.edu 1. History of Stanford University’s Office of Technology Licensing 1.1. Reaching Financial Breakeven a. Time Needed for Reaching Financial Breakeven The mission of the Stanford University Office of Technology Licensing ("OTL") from the beginning has been to promote the transfer of Stanford technology for society's use and benefit while generating unrestricted income to support research and education. Thus, the primary focus of OTL has not been to maximize income generation, but to facilitate putting into use for society's benefit the innovations developed at Stanford. Thus, the OTL accepts and invests in inventions that may have small income potential but never-the-less will bring incremental value to the public. For example, while the OTL accepts and pursues over one-third of the invention disclosures it receives, the for-profit Research Corporation Technologies (a licensing agent for a large number of universities) accepts less than 5%. The OTL also engages in a number of activities that are not income generating, such as serving on committees, assisting in policy formulation and reviews, and providing advice and consultation of intellectual property questions from members of the Stanford community. In judging the time to reach financial breakeven, one needs to define what financial breakeven is. As can be seen in Attachment 1, total revenue has exceeded total expense from the very first year of operation, and from fiscal year 1973/74 (Stanford's fiscal year is September 1 to August 31) by a substantial margin. By this measure, the OTL as been at financial breakeven from its first year of operation, although it should be noted that total expense does not include costs of patenting. When the OTL was established in FY 1969/70, it was agreed that 15% of gross revenue would be allocated to offset costs of operation. As shown in Attachment 1, using this measure of financial breakeven, the cumulative 15% amounts did not exceed total costs until FY 1988/89, or 19 years from the formation of the OTL. However it should be noted that through FY 2000/01, the cumulative total has now reached over $45 Million. This surplus has been used to cover patent cost write-offs (as shown in Attachment 2), to fund the OTL Research Incentive Fund, to fund invention enhancement via the Birdseed and Gap Funds, and other uses as determined by the Dean of Research. (Note: information on the Research Incentive Fund and invention enhancement funds can be found on the OTL website "otl.stanford.edu" under "about OTL" then under "resources" and then in the OTL Newsletter Brainstorm and the OTL Annual Report). However, when it became clear the 15% amount would not cover the total expenses, it was agreed that the shortfall would be taken from the School share of net income distribution (net income is total revenue less the 15% for OTL and less any direct expenses related to the revenue-generating invention; and is distributed at FY end with 1/3 to Inventors, 1/3 to Inventor's Department, and 1/3 to Inventor's School, where School means the School of Engineering, School of Medicine or one of the other seven Schools that make up the University). Thus, for the

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years prior to FY 1988/89, the actual amount of revenue used to fund the OTL expenses was greater than the 15% set aside each year for the OTL. b. Actions taken to Reach Financial Breakeven In the early years, staffing levels were kept very low to keep total expenses at a low level. There were only two people for the first five years of operation (OTL founder Niels Reimers and his capable administrative assistant Sally Hines). A third person was added in FY 1974/75 and total staffing was three people for the next six years. Another tactic was the agreement of Stanford to treat patent expenses as an asset, and only recognize expense if/when the asset is deemed to have no value (typically many years after the patent expenses were incurred). Historically about one-third of patents are not licensed, and thus are written off as an expense. However as shown in Attachment 2, such write-offs did not become a major amount until FY 1993/94. c. Internal and External Sources of Funding Helpful in Reaching Financial Breakeven According to "A History of OTL" written by Hans Wiesendanger (available from the OTL website), Stanford provided Niels Reimers with a line of credit of $125,000 when the OTL was launched in FY 1969/70. This provided the cash resources to finance the anticipated operating deficits in the early years and was eventually fully repaid. When the line of credit was fully used, an arrangement was made whereby the difference between the 15% of gross revenue allocated to OTL and actual total expenses would be funded from the School share of net income. Thus, there was no accumulated deficit and each new fiscal year started from zero. Also, as mentioned above, patent related expenses were not a part of the OTL expense budget. The university funded such costs and carried the "investment" as an asset on the university books, in effect loaning OTL the money for patenting. A portion of this "loan" was repaid at the time a patent was licensed, as first call on any income after the 15% for OTL is to repay any unreimbursed patent expense. However, if the license agreement included reimbursement of patent expenses as part of the financial terms, then "loan" repayment occurred when such reimbursement was made by the licensee. For patents not licensed, when a decision is made that there is no hope of licensing (typically many years after the patenting costs were incurred), then such patent costs are "written off" the books (i.e., the asset is removed from the accounting records and the associated costs of the patent are repaid, lowering the "loan" amount. Such repayment is not shown as an OTL expense, with the amount being taken from the OTL 15% of gross revenue that is in excess of OTLs actual expenses for the year or as a deduction from the School share of net income if there is not a sufficient excess in a given year. The amount of "write-offs" of patent costs per year are shown in Attachment 2. There has been no external funding (i.e., funds from sources outside of Stanford) to support OTL operations. 1.2. Trend and Change in Organizational Structure and Staffing Attachment 2 shows the OTL staffing levels by year, listing licensing and support staff. The licensing category is people who carry the designation of either Licensing Associate or Licensing Assistant. Prior to 1991, there were no Licensing Assistants, and the growth shown since 1990 in the Licensing category is due solely to the addition of Licensing Assistants.

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Licensing Associates are assigned invention disclosures and are given authority to make all decisions regarding that invention. The Associate reviews and evaluates the invention, to determine if OTL will "accept" the invention. If accepted, the Associate then develops a patenting and marketing strategy, negotiates the terms of the licensing agreement, monitors compliance with the license diligence terms, and negotiates amendments to the license agreement if necessary (most license agreements will be amended at least once, and sometimes several amendments are made over the life of a license agreement). A profile of OTL Licensing Associates is available at the OTL website. A Licensing Assistant works directly with their assigned Licensing Associate, with their work responsibilities set by the Associate. Marketing is a labor intensive activity, so Assistants spend a significant portion of time assisting the Associate in locating, contacting, and following up on potential licensees. There is a good deal of effort required in keeping the paper and computer records related to licensing activities, and Assistants do most of this work. As part of their training, Assistants are given selected inventions to perform the evaluation, marketing, and licensing functions, under the supervision of their Associate. A number of Assistants have been promoted to Associate status, when an opening for a new Associate occurs. Support functions include the office receptionist, computer support personnel, compliance person, accounting personnel, filing support, administrative support person to the OTL Director, and the OTL Director. Niels Reimers, when he founded and directed the OTL (1969 - 1990), believed in a flat organization. Each person in the OTL was a valued member of "the team" and a part of the "OTL family". He granted considerable authority and responsibility to Licensing Associates to make decisions, including determining the terms in a license agreement. There were no oversight or review committees. The Director of the OTL is delegated authority from the Stanford Board of Trustees to sign license agreements, so no review or signature outside of the OTL is needed. As can be seen on Attachment 2, the staffing for the first five years was only Niels and Sally. In FY 1974/75, a licensing person was added, and staffing level remained at three for the next six years (through FY 1979/80). In 1980, there was a sharp increase in number of invention disclosures (from 67 in 1979 to 142 in 1980) and in FY 1980/81, there was a sharp increase in gross revenue (from $655,000 to $1,215,000). Hans Wiesendanger in "A History of OTL" speculates that the jump in the rate of invention disclosures was caused by the passage of the Bayh/Dole act, which gave ownership rights to Government funded inventions to the university. Niels projected major licensing growth in the life sciences (with emphasis on biotechnology) and computer software products, and obtained authority to increase staffing based on expected growth in gross revenue and the increase in the number of invention disclosures flowing into the OTL. With rapidly growing gross revenues, mainly from the Cohen/Boyer RDNA invention (case study included in this report), staffing levels increased over the next ten years from 3 to 18. In FY 1981/82, the software distribution center ("SDC") was formed. It served as a place where faculty could arrange for the distribution of software they had created and which others were requesting. This software was offered "at cost" to non-profit organizations, and for a modest fully paid royalty to for-profit organizations. It also encouraged the submission of invention disclosures for software programs that had potential for licensing to third parties, such third parties to then develop commercial versions (with useful documentation) for sale to end customers and with royalty payments to the OTL based on product sales. It should be noted that this effort resulted in a number of software licenses (with copyright and sometimes affiliated trademark protection, but no patents) which have total royalties in excess of $1 Million. Attachment 2 shows the royalties attributed to the SDC for the FY period 1984 through 1990, from OTL Annual Reports. Unfortunately there is no published data for the FY 1981/81, 1981/82, and 1990/91 years. The SDC was dissolved in 1992, when the person who had managed it left

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the OTL. It should be noted, however, that software-based inventions continue to be an important source of royalties to this day. The first, and perhaps only, major change in organizational structure, occurred in FY 1990/91. The OTL was now a "mature" office with over 20 years of operation. The number of invention disclosures had grown, but a related growth in Licensing Associates had kept the disclosures per Associate at a manageable level. What had changed was the number of active licensing negotiations in progress per Associate, and the number of licenses signed per Associate (needing monitoring and amendments). Each required considerable attention and time. Available time for evaluation and marketing of disclosures was a growing problem for Associates, as was dealing with the expanding volume of record-keeping and patent related administrative functions. In response, an experiment was proposed to create a new position of Licensing Assistant. The first was hired in FY 1990/91 and others were added as it became clear how useful and valuable the Assistants were. Currently there are seven Licensing Assistants. In 1998, the OTL requested a review of its operations by a volunteer Alumni Team from the Stanford Graduate School of Business. One of their recommendations was to create a mechanism for Associates to share knowledge and assist others when facing challenging decision situations. This led to weekly "team meetings" divided into life sciences and physical sciences groups, where each participating Associate and related Assistant can present items for review and discussion. Frequently this collective wisdom can help guide an Associate towards a better decision or an approach they might not have thought of to solve a particular situation. 1.3. Trend and Change in Systems Supporting the Technology Transfer Function a. Internal and External Alliances and Collaborations Helpful in Creating a Successful Technology Transfer System Stanford has historically (at least for the past 50 years or more) actively encouraged involvement with industry. Many of the programs are listed at the website: corporate.stanford.edu. The relationships created by these proactive efforts have been very important in the success of technology transfer and formation of university-linked start-up companies. They have also brought considerable funding to Stanford. For example, in the fiscal year 1999/2000, corporate revenue to Stanford totaled $172 million, from the following sources: 6. $11.3M from company subscriptions to the Stanford Center for Professional Development.

This School of Engineering initiative (now over 30 years old) provides state-of-the-art instruction to employees of 450 member companies (world-wide) via closed-circuit television and over the internet. If accepted for enrollment, an employee at their company location can earn a Masters of Engineering degree, however non-degree and audit options are also available. More information is available at the website: scpd.stanford.edu

7. $17.7M from Industry Affiliate Programs. Companies pay an annual fee to these department-managed programs to receive a number of benefits, typically (a) preprints of publications; (b) a resume book of all students; (c) a designated faculty liaison person; and (d) an annual two-day meeting to meet faculty and students and to hear presentation on the latest research results. Further information is at: corporate.stanford.edu

8. $36.9M from royalties under licenses granted by Stanford’s Office of Technology Licensing (OTL). Further information at: otl.stanford.edu

9. $42.1M in industry sponsored research. The research sponsorship agreements are negotiated by the Industrial Contracts Office (ICO), which is a part of OTL. The ICO also handles collaboration agreements (industry/university joint research programs, typically with exchange of people and loans of equipment, but no funding) and Material Transfer Agreements. Further information at: ico.stanford.edu

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10. $64M in donations and gifts through Stanford’s Office of Development. These donations may be contributions towards buildings (many rooms in new buildings have plaques identifying a corporate contribution towards the cost of constructing the room), endowed professorships (where the corporate name will be linked in any public listing of the professor’s name), or contributions to Interdisciplinary Research Centers, where the company may have a representative on a research advisory committee and may also have company scientists work in such industry-supported Centers. Total donations in FY 1999/2000 exceeded $300 million, with a good portion from wealthy individuals (usually alumni) either while living or as a bequest when they die. Stanford makes great effort to maintain contact with alumni and has extensive programs, usually coordinated through a world-wide network of Alumni Clubs.

Thus, it is very important the OTL have good communication with the other groups interacting with industry so that actions by the OTL do not have a negative effect on other forms of relationships. If it appears some form of dispute may arise with a company (e.g., we suspect they are infringing a Stanford patent) the OTL will check with other groups to see if that company is providing substantial support to Stanford. With regard to licensing, our connections to other Stanford groups can be helpful. The key to licensing is to find and convince someone within a company that his/her company needs the invention from Stanford. This person then becomes an advocate within the company to take a license. Sometimes an industry person that is interacting with Stanford, perhaps through the industry affiliate programs (which frequently allow industry scientists to work in the Stanford research laboratories) will learn of an invention and request information on licensing. The OTL also sends information on new inventions to members of industrial affiliate programs. Industry sponsored research agreements provide a first right to a royalty bearing exclusive license to the sponsor, and this may lead to licenses. The OTL works with the Industrial Contracts Office in structuring the intellectual property terms in industry sponsorship research agreements. It is important to note that a key element in the success of the OTL has been the attitude and approach of Stanford University in proactively creating strong relationships with industry. With regard to external alliances and collaborations, there are two Associations that have been a source of professional development and a source of contacts with industry for the OTL staff. The Licensing Executives Society (LES) is a group more focused on company to company licensing than on university to company licensing, but many university licensing people are members and find value in the services offered by LES. The Association of University Technology Managers (AUTM) is focused only on university to company licensing and is evolving into an international association, with currently over 30 members from Japan. Niels Reimers was very active in LES and served as President of LES USA/Canada in 1978/79. The OTL covers the cost of membership in both LES and AUTM, and encourages OTL staff to be actively involved in the activities of these associations. Since the mid-1980's, AUTM has been the most influential association for university licensing people. Through Meetings, Courses, and Publications, AUTM has provided training and professional development of OTL staff and provided useful contacts with others involved in University to Industry technology transfer. Approximately 50% of the about 3000 AUTM members are affiliate members, and about 50% of the affiliate members are industry people who are seeking to establish relationships between universities and their companies. b. Internal and External Support Systems Helpful in Creating a Successful Technology Transfer Office

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Good administrative support systems and procedures are required for a successful technology transfer office. The OTL continually reviews and improves such systems and procedures, as the volume of transactions continues to grow over time. The basic docketing and filing system created when the OTL was started continues today. Each invention disclosure is assigned a docket number, such as S01-125. The S is for Stanford, the 01 is the year (2001) and the 125 represents the 125th invention disclosure received since the start of the year (January 1, 2001). Each invention that is accepted and on which a patent will thus be filed is assigned a unique university accounting number where all income and expense related to that docket is entered. Each docket has three paper files: (1) a correspondence file; (2) a patent file; and (3) a license file. Today, most information is computer created, and the OTL has developed a complex computer data base system where information of all kinds is stored. The database has separate but interconnected files for such things as dockets, people contacts, company contacts, licenses and licensees, patents, and accounting information. It should be noted that there are today a number of commercial firms that provide such data base systems for licensing offices. The OTL has also developed over the past several years a Standard Operating Procedures manual that documents how various transactions and office operations will be handled. AUTM offers each year, usually in September, a three-day course named TOOLS which covers administrative support procedures and systems. It provides support personnel in licensing offices with training and useful documentation. 1.4. Attributes and Conditions of a Successful Technology Transfer Office a. What Attributes and Conditions are Present in a Successful Technology Transfer Office The licensing office at Stanford was launched in 1969/70 based on a unique model, which has now become widely adopted by others. The OTL would be a separate unit within the university and only do licensing. Inventions not sponsored by an external organization (e.g., the U.S. Government) would be owned by inventors, but if they chose to work with the OTL, they would be stakeholders in the technology transfer process (getting one-third of net royalties). The OTL would be funded from royalties from licenses, taking 15% of gross royalties earned. Each invention would become a mini profit-center with a single licensing person responsible for all decisions from beginning to end. Outside patent attorneys would be used to file for patents. Patent costs would not be “expensed” in the year incurred, but would be treated as an asset and only expensed if written off some years later. The university would provide a line of credit to cover cash flow fluctuations in the early years of operation. It was in essence a new business start-up within the university. At the time, it was a unique and innovative concept. A new business, if it is to thrive, must develop a line of products or services that someone wants to buy. For university licensing, this means: (a) creating policies and procedures that encourage the disclosure of inventions, (b) developing analysis techniques to determine which inventions have commercial potential, and (c) developing marketing strategies to find potential buyers. In university licensing, the inventor plays a critical role. The inventor is the source of invention disclosures, assists in the filing and prosecution of patents, provides leads on possible licensees, meets with prospective licensees to explain the merits of the invention, and may serve as a paid consultant to assist in product development. Most licensing relationships result from some form of inventor contact or referral. Inventors can identify companies who have shown prior interest in their work, or who they believe should have interest in their invention, or companies with whom they have had consulting agreements. Thus, if an organization wishes to locate licensable technology from a university, it should ensure the faculty doing research relevant to its interests are aware of its interest. It can also contact the

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university licensing office and ask for a listing of inventions by certain faculty, or in a particular area of interest. The more specific the area of interest, the better chance of finding a relevant invention. And many university licensing offices now have websites where you can learn about their activities and find a listing of inventions available for licensing. Stanford’s can be located at http://otl.stanford.edu. Other university licensing office sites can be found through the Association of University Technology Managers (AUTM) website at http://www.autm.net. b. Internal and External Benefits from the Activities of a Successful Technology Transfer Office The benefits to Stanford resulting from the formation and operation of the OTL have been many. Although it took many years before substantial net revenues were obtained, at the end of FY 2000/01, the OTL had received total revenues of $496 Million and had total expenses of $29 Million. Revenue from the DNA invention accounted for $255 Million, and this was shared equally with the University of California as their faculty member, Herbert Boyer, was a co-inventor with Stanford’s Stanley Cohen. Thus, in it’s 32 years of operation, the OTL was distributed over $300 Million to inventors and to support research and education at the university. The relationships the OTL creates with licensees brings with it benefits to the university. Such companies often choose to fund research in the laboratories of the inventors. They also frequently ask the inventors to serve as paid consultants, and/or to serve on the company’s Scientific Advisory Board -- for which they receive compensation. Such added income (including the OTL inventor share royalty distributions) helps close the gap in the salary the university can pay versus what industry can offer, thus encouraging faculty to remain at the university. Licensees also sometimes loan or gift specialized equipment to the inventors lab to help accelerate research efforts and/or to receive comments and suggestions from university researchers about the equipment. And licensees also may hire the student co-inventors (most inventions have a faculty person and one or more graduate students as co-inventors) when they graduate. The OTL also provides a number of services to the university. OTL staff are knowledgeable about intellectual property laws and the university polices and procedures concerning intellectual property. Such staff respond to questions from the Stanford community, serve on committees, and give presentations and help teach courses. Stanford offers many courses (currently about 30) on entrepreneurship, and some require creating a business plan. The OTL is a good source for inventions and ideas that can serve this role, and sometimes these classroom exercises are extended into the real world and become actual start-up companies. The OTL also creates benefits for society. The role of the OTL is to bring to use for public benefit the ideas and inventions generated within the university. Not only do these new products and services improve the quality of life within our society, there can also bring economic benefits. Using conversion factors developed by AUTM, the almost $500 Million in royalties generated by Stanford OTL licenses represents over $20 Billion in sales of new products and services, several billion dollars in incremental tax revenues, and over 150,000 incremental jobs within the economy. In 1991, the Association of University Technology Managers (AUTM) began an annual comprehensive survey of its university members in the U.S. and Canada (including teaching hospitals). This survey collects data in a number of areas, and also provides information on start-up companies spinning out of universities and on important inventions that have brought significant benefits to the public. Table 1 shows the growth since 1991 in three areas: patents filed; licenses granted, and royalty income. AUTM also publishes a quarterly Newsletter, an annual Journal, and a three volume Technology Transfer Practice Manual. Information about these publications, as well as

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the many meetings and courses offered by AUTM, can be found at its website: www.autm.net.

Table 1

AUTM Survey Results 1991 - 1999 Year Patents Filed Licenses Granted Royalty Income (Millions of USD) 1991 1643 1278 186 1992 1951 1741 248 1993 2433 2227 323 1994 2429 2484 360 1995 2872 2616 424 1996 3261 2741 514 1997 4267 3328 611 1998 4808 3668 725 1999 5545 3914 862 In the year most recently surveyed (1999), the total sales of university licensed products was calculated as $40 billion, creating several hundred thousand new jobs and over $5 billion in incremental tax revenues. 2. Change in Financial Conditions for Stanford’s OTL: Yearly Years (FY 70 through FY 80;

Middle Years (FY 81 through FY90; and Recent Years (FY 91 through FY 01 2.1. Sources of Revenue a. Royalties As can been seen on Attachment 1, royalty grow in the early years was, compared to later years, relatively modest -- from $55,000 in the first year to $655,000 in FY 80. During this period, there were no significant earned royalties from product sales. Typical was the FM sound synthesis invention licensed to Yamaha in 1974, where product introduction and thus earned royalties did not start until 1984. Eventually this invention produced over $22 Million in royalties, but most of this amount came in the late 1980s and early 1990s. Although as will be explained later, there are factors in the current environment that have reduced the average time to market for some invention categories, for most inventions, the time from invention disclosure to market introduction (and thus earned royalties) is many years. The middle years was a period of significant income growth (from $1.2 Million to $13 Million) benefiting from the RDNA license program with its many licenses (earning a $10,000 licensing fee and $10,000 per year annual royalties), and the flow of earned royalties from the Yamaha license. Licensing during this period was strongly weighted towards the life sciences, with biotechnology licensing leading the way. As is typical, a very few inventions produced most of the royalties, and with the exception of the Yamaha license, the vast majority of royalty income came from medical related inventions. The medical industries tend to have products with relatively large gross margins that can afford an earned royalty and still produce acceptable

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profits. These industries also do not have the patent proliferation that exists in some other industries (e.g., consumer electronics or computer products) where many patents may have to be licensed to market a product. The later years have seen significant royalty income ($409M of the $465M), due mostly to earned royalties from the RDNA licenses. However Non-RDNA royalties have also shown good growth during this period (from $8.4M in FY 91 to $38.6M in FY 01). This reflects the sheer volume of licenses that have been signed and thus the expansion of the base of licenses that are generating royalties. b. Liquidation of Equity Holdings As seen on Attachment 1, meaningful income from sale of equity did not appear until the mid-1990s. There was some income from sale of equity prior to FY 95, but it was quite small, and records for it could not be found. During the early years, the licensing of start-up companies was very rare, and when done, equity was not taken. During the middle years, an incident at Harvard University in the early 1980s resulted in a policy that Stanford would not take equity in a start-up company where Stanford people had any involvement. The “incident” was the formation of a Biotech company by some Harvard people virtually within the university, apparently using university resources for the benefit of the start-up company. This caused Stanford’s President to call a conference of University Presidents at the Pajaro Dunes Conference Center, the result of which was a strong statement that universities should not be providing resources for start-up companies or acquiring equity that might create conflict of interest situations. This policy remained in effect at Stanford until 1992, and resulted in almost no equity from the licensing of start-up companies. Since 1992, the policy has shifted, where today, the OTL is encouraged to take equity when licensing start-up companies. Of about 75 start-up companies providing equity to the OTL, 36 have been in the past two years. This may reflect a 1998 change in policy and illustrates how policy makers should be aware of the incentives (or disincentives) of such policies. Prior to 1998, all proceeds from the sale of equity went to a graduate student fellowship fund. None went to the OTL and none went to inventors, whose good-will and support is so crucial to the success of the OTL. Thus, for the OTL, it created a very difficult dilemma when negotiating a license to a start-up and balancing taking cash versus taking equity as the license issue fee. Clearly it was in the best interest of the inventors to take cash over equity and there was even the possibility of legal action by inventors if a significant amount of income was at stake. c. Other Types of License Income Licensing of University trademarks for placement on sweatshirts, caps, or almost anything, is widespread in the U.S. Some universities with a large alumni base and strongly supported athletic teams receive millions of dollars per year from licensing the use of their trademarks. At most U.S. universities, the licensing function is delegated to a group other than the OTL (e.g., with the Bookstore, the Athletic Department, or other Administrative unit). However at Stanford, it is within the OTL. Attachment 1 shows the royalties since the licensing function was transferred from the Stanford Bookstore to the OTL in 1987. From 1979 to 1987, the Bookstore had been the licensing entity, although it had contracted this responsibility to a licensing agent. Stanford had received a total of only $13,000 in royalties over this period. For a number of reasons, the licensing responsibility was transferred to the OTL in 1987, and $4.5 Million in royalties have been received through the current year. 60% of net income goes to undergraduate student financial aid and 40% goes to the Athletic Department.

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Another type of licensing income is from the licensing of Tangible Research Products (“TRP”). These are research products that have no intellectual property connected to them but are difficult or expensive to create. They are normally provided at cost to other non-profit research organizations, but are licensed to for-profit groups. Examples include biological cell lines, antibodies, etc. The OTL is issuing perhaps 15 to 20 such licenses per year. For most, the royalties are small (under $10,000) but some have royalties of $50,000 or more, sometimes annual payments of $5,000 to $10,000 and sometimes even earned royalties if commercial products are marketed using the TRP. This type of licensing should not be overlooked, as there is no intellectual property cost, and royalties can add up to a tidy sum. d. Income from other than Licensing The United States Income Tax Code provides a specific exemption for universities for “rents and royalties” from classification as Unrelated Business Income (“UBI”). UBI is avoided if at all possible, as income tax must be paid, and just the accounting and filing of UBI related forms is costly. Thus, the OTL is only authorized to license and receive income that falls under the definition of royalties. 2.2 Expenses a. Legal Fees Expended and Reimbursed Data on actual expenditures for legal fees and reimbursements could not be found until this data began to be reported in published materials around 1990. Thus there is no actual data for the early and middle years. Legal costs could be very roughly estimated by looking at the number of patent applications (major source of legal costs) and number of licenses (source of reimbursements) per year as shown in Attachment 2. It can be noted that the percentage of invention disclosures that were accepted and patented is lower in the early years than in the middle and later years. Even though patent costs were not part of the OTL budget, patent cost write-offs would be visible and keeping such write-offs to a minimum was a concern. And indeed, such write-offs (as shown in Attachment 2) were negligible until the mid-1980s. In Attachment 2, one can see a step-up in invention disclosures in FY 1979/80 (from 67 to 142) followed by a step-up in patent applications two years latter (from 28 to 45). There is a lag between invention disclosure and a decision to patent that is typically many months to a few years. The later years have seen major growth in patenting costs. This is due to growth in number of patent applications, but also due to significant growth in patent attorney hourly billing rates. By deducting the amount of reimbursements and write-offs from patent costs, one can calculate the amount of "inventory" growth in a given year. At the end of the FY 2000, this inventory amount (unlicensed patent investments) had grown to $4.4 Million. One will note a step-up of patent applications in the mid-1990s. This is partially due to the step-up in disclosures, but two other factors are also responsible. One is the ability to file low cost Provisional Patent Applications (some of which are abandoned when the one year lifetime expires) and the second is a strategy shift to file Continuation-In-Part patent applications for important inventions. For example, a Scanning Confocal Microscope invention, which is licensed in different fields of use to four different companies, has six CIP patents, three of which were filed to increase the base of patent protection, and three were filed at the request of licensees to obtain patent claims specific to their particular field of use products.

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b. Salary Expenses for Licensing Personnel Actual data is not available, as actual salary information by person is kept confidential. However one can make reasonable estimates by use of the following algorithm: Assume 90% in the early years, 80% in the middle years and 70% in the later years of total expense (as shown on Attachment 1) is salaries, and then assume that support staff salaries are 50% of licensing staff salaries (relative staffing levels by year given on Attachment 2). c. Salary Expenses for Non-Licensing Personnel See b. above d. Facility/Space Expenses Except for the periods 1987 and 1988, and 1993 to present, the OTL was located on the Stanford Campus and there were no charges to the OTL for use of space. e. Other Expenses Other expenses in the early years were almost nil, and started to grow in the middle years as the number of staff grew. Even during the middle years, this remained a small percentage of total expenses. This was the era of personal computers, and the purchase of computer equipment started to become noticeable in the budget. During the later years, computer related expenditures have increased significantly, but having computer tools is now an absolute necessity. 3. Successful Licensing Stories

3.1. The “Big Hit”: Cohen/Boyer Recombinant DNA Every licensing office would like to have a "Big Hit", defined as a license that brings in tens of millions of dollars, or as was the case with Stanford's Cohen/Boyer Recombinant DNA ("RDNA") invention, hundreds of millions of dollars. Historically, almost all Big Hits have come from medical connected inventions, such as the cancer treatment drugs Taxol (University of Florida) and Cisplatin (Michigan State University). Case studies of the two Stanford Big Hits are attached (RDNA non-exclusively licensed to over 300 companies and FM Sounds licensed exclusively to Yamaha). The Big Big Hit was clearly RDNA, which over its patent lifetime generated $255 million in royalties, shared between Stanford and the University of California. The attached three articles about RDNA provide a fairly complete description of the invention, how it came into being, the many issues and controversies it provoked, how they were resolved, and the very creative licensing program devised by Niels Reimers. (Note: the Article "Tiger by the tail" by Niels Reimers, describing in great detail the RDNA invention, the various issues about it, and the associated licensing program, is available at the www.autm.net website, by clicking on "journal" and then clicking on 1995). Some lessons learned from the RDNA invention and licensing program include: (1) If one believes a potential "Big Hit" has been disclosed, it should be given priority attention and incremental resources. For RDNA, Niels spent considerable effort just in convincing the inventors the OTL should be allowed to file for a patent (they were resistant). He then had to devote additional effort to convince the funding agencies to grant ownership of patent rights to Stanford. Then there were years of controversy over whether such a "life form converter" could or should be patented. And finally, when all this had been worked through, Niels hired a person specifically to market this controversial invention.

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(2) RDNA was a totally new concept on which, not just a new product, but a whole new industry could be built. Niels wanted to see lots of new companies formed to pursue a wide number of applications, and this lead to a non-exclusive licensing strategy. He wanted to encourage companies to take a license and start investing in product development, so he offered a five to one credit on the $10,000 license issue royalty and the first five $10,000 annual payments, providing a $300,000 credit against earned royalties for the $60,000 paid to the OTL. (3) Aggressively protect and market your Big Hit. Big Hits require large royalty payments, so companies will be motivated to try in invalidate the patent(s) or avoid taking a license by asserting the patent(s) is not valid. Niels, in an unusual move, opened the patent prosecution to the general public, thus companies could present prior art to the examiner before the patent(s) issued. After the patent(s) issued, he hired a leading patent firm in Washington D.C. to review the strength of the patent(s) if forced to litigate. When a company suggested they would not license due to doubts about the strength/validity of the patent(s), a telephone call from the D.C. firm would almost always change their position. After the initial surge of 87 licenses and then a lull, Niels hired a full time person to investigate markets/companies and actively pursue new licenses, which lead to a significant number of new licensess. (4) Review and adjust the licensing program as market and licensing conditions change. In another unusual move, the RDNA license was commercially printed on special paper, as a signal to potential licensees that terms were fixed and not subject to negotiation. However the OTL did revise the license agreement a number of times over the 16 years of the licensing program, each time issuing a new printed version.

3.2 Start-Ups: Pixim; Cbyon; and Bandwidth9 Attached are three articles on start-up companies that are licensed by the OTL. This is a very small sample of the about 100 start-up companies licensed by the OTL over its history. However for reasons to be covered shortly, most start-up licenses have occurred in the last ten years, with almost 40 in just the past two years. The three examples cover two common situations leading to a start-up: (1) Pixim has started by students, who upon receiving their graduate degree, chose to form a start-up rather than taking a job with an existing company; and (2) Cbyon and Bandwidth9 were started by a faculty members who took a leave of absence from the University to be actively involved in a start-up. A third situation is where the faculty who created the technology licensed by the start-up are involved with the start-up, but remain full-time at the University. Stanford policy allows this if the faculty member restricts his/her involvement to consulting services (one day per week is permitted) and/or to service on a Scientific Advisory Board. (Note: The article on Bandwidth9 identifies Connie Chang-Hasnain as a faculty member at the University of California, Berkeley, but she was at Stanford for a number of years until transferring to Berkeley a few years ago, and several key patents licensed to Bandwidth9 resulted from her research work as a faculty member at Stanford.) Until 1992, Stanford policy was not to take equity in a start-up company if Stanford people were affiliated with the company, which is almost always the case. In 1992, the policy changed and the OTL was allowed to take equity, normally in exchange for cash for the one-time license issue royalty (a license typically has three income components: (1) a one-time license issue royalty; (2) an annual royalty payment, creditable against future earned royalties; and (3) earned royalties based on sales of licensed products). However all the proceeds from equity went to a graduate student fellowship fund. This created a difficult situation for OTL licensing people, because if they chose to take equity instead of cash, both the OTL 15% and the inventors 1/3 share would disappear. Because a good relationship with inventors is very important for the OTL, it was

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difficult to seek equity in place of cash payments. This policy was changed in 1998, so that the OTL and the inventors now receive the proceeds from equity as if it was cash. Some reasons why we are seeing many more start-ups in recent years include: (1) A greater acceptance, and even encouragement of faculty and students to be involved in start-ups.. This may be due to a better understanding of how to manage and monitor conflict situations, and a recognition that risk can be minimized with effective policies and control systems. Stanford created a detailed conflict of interest/commitment policy in the mid-1990s. Concerns about conflict of interest and conflict of commitment were the major reasons for the pre-1992 equity policy. (2) The success of many faculty and students (some becoming very wealthy) by being involved with start-ups. Many faculty have taken leaves of absence to be involved with a start-up (including John Hennessy, Stanford's President). It is now an accepted practice for faculty to be involved with a start-up, and to take a one year leave of absence to do so. (3) In areas that tend to create technologies suitable for a start-up (e.g., computer science, applied physics, electrical engineering, materials science), there is greater involvement of industry if setting research agendas. This occurs through industry funding of industrial-affiliate programs and interdisciplinary research centers. And this "industry-guided" research produces discoveries that have commercial markets and where time to market is short enough that a start-up is viable. (4) There has been rapid growth in the number of Stanford courses teaching entrepreneurship (now over 30 per year) and frequently the lecturers at such courses are venture capitalists or others searching for start-up opportunities. (5) There is an abundance of funding, incubation facilities, and other resources in the Silicon Valley that make this a rich environment for the creation and nurturing of a start-up.

3.3 Licensing a Large Company: General Electric Attached are two articles describing the relationship between General Electric Medical Systems ("GEMS") and Stanford. The relationship began in 1978 and continues as a strong relationship today. General Electric made two significant decisions when it decided to enter the medical imaging business in the 1970s. First, it would not build a large research division, staffed with numerous PhDs, but instead would partner with selected university research programs to obtain strategic research results (however it would create a strong engineering division that could convert strategic research into commercial product quickly and efficiently). Second, it would proactively work with the licensing departments at the selected universities to create positive, productive relationships. Some research programs selected included Duke University, Mayo Clinic, University of Wisconsin, and Stanford University. The primary contribution of GEMS to these research programs was equipment. GEMS provided the latest models of (very expensive) MRI systems, and continually upgraded the systems to keep them state-of-the-art. This, of course, greatly facilitated the transfer of equipment improvements (some of it software based) to the GEMS equipment. GEMS also provided modest research funding, supplementing the much larger funding amounts from U.S. Government agencies such as the National Institutes of Health. However by writing very broad work descriptions related to the GEMS funding, most invention disclosures would list GEMS as a sponsor, giving them preferential licensing rights. GEMS in the 1980s and early 1990s also partnered with Stanford in jointly licensing the Stanford and selected GEMS patents to competitors of GEMS. This joint licensing program produced several millions of dollars in royalties for both Stanford and GEMS.

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In 1991, GEMS approached the OTL with a problem. The existing agreements only allowed for royalty-bearing licenses if GE wished a license. However many of the inventions were only relatively minor improvements, and although it would be nice to incorporate them and put them into use, GEMS could not do so if an earned royalty was required. This lead to a new form of agreement where GEMS would provide an annual payment of $50,000. Stanford would submit medical imaging invention disclosures for GEMS review, and if selected by GEMS, GEMS would pay all patent related costs and have a non-exclusive royalty-free license. However if the invention was incorporated into GEMS equipment, than a payment of $25,000 was made. The inventors whose inventions were selected by GEMS received a pro-rata share of the $50,000, and of course they would also share in the $25,000 payment if their invention was used in GEMS equipment. This program, which is still in force, resulted in a noticeable increase in medical imaging invention disclosures. The relationship with GEMS included donation of expensive medical imaging equipment, research funding agreements, licensing agreements, and GEMS scientists on-site within the Stanford research program. GEMS has received dozens of invention disclosures and access to the latest research results, some of which has been converted into improvements in GEMS equipment, contributing to maintaining GEMS market leadership in this industry sector.

3.4 Licensing a Small Company: 3.5 Licensing Outside the U.S.: Yamaha Attached are three articles describing the inventions and licensing arrangements between Stanford and Yamaha, a relationship started in 1973 and that continues on today. Also, the Chapter "The Sound of One Chip Clapping" in the book We Were Burning: Japanese Entrepreneurs and the Forging of the Electronic Age authored by Bob Johnstone and published in 1999 by Basic Books, provides a detailed narrative of the development of the FM Sound technology by Yamaha, from their perspective. The attached article "Case Study: Stanford's FM License" authored by Joe Koepnick (the OTL Licensing Associate responsible for the Yamaha relationship until it was transferred to the author of this report a few years ago) and published in les Nouvelles (the Journal of the Licensing Executives Society) in June 1995, provides some useful points. The article describes the many amendments made to the license agreement over its life. This is not unusual. Most University technologies are far from market, and a lot can happen that can not be predicted. Thus, it is important that both sides during a negotiation recognize the "final agreement" is not final, and such agreement can and likely will be amended as actual experience unfolds. Usually if both sides understand that it is not necessary to get everything perfect and that changes can and probably will be made in the future, the negotiation proceeds more rapidly and smoothly. Another point the article brings out is that the relationship is what is important, not the license agreement. The license agreement focuses on intellectual property rights (i.e., to something that has occurred in the past) while the relationship allows the two-way flow of future benefits. Although separated by a long physical distance, there was still a strong communication flow between the parties. And when a follow on technology was created at Stanford in the late 1980s, Yamaha was the first to hear about it, and was the first to be offered licensing rights. The article also points out when Stanford's patent expired (in April, 1994), Yamaha had created its own sizable portfolio of patents, allowing it to protect its investments in the FM technology. Most exclusive licenses from Stanford have the 8/5 term of exclusivity (the shorter of five years from first product sale or eight years from the date of the license). The prospective licensee almost always wishes a much longer term. The purpose of the limited term is to permit the

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licensee to obtain a reasonable return on its risk capital investments in bringing the invention to market, but not to have an extended monopoly period that is against the public interest. The reality is that either (1) if circumstances delay the introduction of a licensed product or for some other good reason, the term of exclusivity can be extended by amendment of the agreement; or (2) the licensee will create its own patent portfolio, so the need for exclusive rights to the Stanford patent is not needed (i.e., the Yamaha situation). The article "Licensing Case Study - Stanford University" from the book How to License Technology authored by Robert Megantz and published in 1996 (revised version due out in 2002) by John Wiley & Sons, identifies and documents two important events. The first is the development of the Sondius trademark. When reviewing an invention disclosure, it is important to determine if there are other intellectual property components beyond just potential patent rights. If the invention includes computer software, copyright to the software code may be very valuable. And if the invention has a unique name associated with it, this can be a valuable trademark (and trademark rights can last forever, as opposed to patents that have a limited life). In the case of the Waveguide technology (the follow on technology to FM sounds), there was no unique name -- so Stanford created one. The other event is the formal alliance created in 1997 between Yamaha and Stanford, where both parties pooled their respective intellectual property (which included patents, copyright to software, and trademarks) into a combined licensing program. Stanford is the delegated licensing party, with Yamaha sharing equally in royalties received. This alliance is unique, but reflects the close relationship between the two organizations and the value of a collaborative partnership. A long-term collaborative partnership is what every university to company licensing arrangement should strive to be.