It’s Time to Save the University of California

I view myself as a product of the University of California.  UC is the reason I came to California and it’s one of the reasons I’ve continued to make this state my home for the past 12 years. My wife and I moved to California in 2000 when I was awarded a Lawrence Fellowship at Lawrence Livermore National Laboratory (part of the UC campus system) and my wife was offered a postdoc position in Neuroscience at UCSF.

For the next 7 years, I ran a nanomaterials research group at LLNL, during which time, I had the opportunity to form academic research collaborations with faculty at UC Berkeley, UCLA, UC Riverside and UC San Diego.  In 2005, I decided I wanted the next stage of my career to focus on commercializing the science and technology that I had been researching.  So again I turned to UC and I enrolled in the Executive MBA program at UC Berkeley.  For the last 5 years as a Partner at Physic Ventures, I’ve been investing in startups developing technology in the field of Sustainability.  I maintain my close ties with UC, guest lecturing at Haas, working with UC faculty to commercialize UC inventions, and hiring numerous UC science, engineering and business graduates into the startups that Physic Ventures invests in.

So over the last 12 years, I’ve had the opportunity to engage with UC as a student, a researcher, a teacher, and now an investor in the California economy.  From all these vantage points I can state categorically that UC is one of the greatest University systems the world has ever known.  It sits at the pinnacle of academic achievement, it is an engine of innovation for the California and US economy, and it currently provides a world class University education to over 222,000 students.

UC isn’t the only world leading University that I’ve experienced.  As an undergraduate and PhD student, I was fortunate to receive one of the best University educations available. I studied Natural Sciences at the University of Cambridge and then I stayed at Cambridge to complete a PhD in semiconductor Physics. Like UC,  Cambridge is a public University, but no one would argue that it’s anything but elite. Cambridge admits a mere 3000 students per year, only half of which come from public schools.  In contrast, the UC system is a truly public system, offering the opportunity of a world class education to all California high school students.  It specifically offers a local eligibility program that guarantees admission to a UC campus for the top 9% of students in a high school class.  This is what really impressed me with UC when I arrived in California.  It is one of a handful of University systems that maintains elite academic standards and offers broad availability to hundreds of thousands of California students.

So why am I writing this homage to UC?  I’m writing because I believe that state imposed UC budget cuts risk fatally damaging one of the crown jewels of the state that I’ve adopted as my home.  According to Lt. Gov. Gavin Newsom, who is on the board of trustees of the UC system,“This is the code red we’re in. We’re not cutting into muscle or tissue, we’re cutting into artery.”

In response to initial budget cuts in 2007, UC took all the usual actions.  It increased tuition rates, it increased the percentage of high fee paying out-of-state students, it cut less popular classes and instigated a faculty pay freeze.  Now there is nowhere left to cut.  However, every year for the last 5 years, state support for UC has continued to decrease, tuition rates have increased way above the rate of inflation, and academic salaries continue to decline compared to those at other institutions.

It seems like every month I’m hearing about another former UC colleague who has left for a better salary, larger research budget, or fewer bureaucratic constraints at another University system.  Every year we hear about more middle class students declining places at UC in favor of less rigorous academic institutions with more affordable tuition rates.

Watching this decline of UC is like watching a train wreck in slow motion.  It doesn’t have to be this way.  It is simply a matter of priorities.  As always happens, politicians make funding decisions based on short term political calculation.  The impact of this slow bleeding of UC will not be obviously apparent in the short term, but rather it will be felt over decades.  As fewer middle class students can afford UC tuition rates, academic standards will decline and California’s work force will slowly become less competitive and innovative.  As world class researchers leave UC for Texas, Massachusetts, or perhaps Asia, this research based catalyst for innovation in CA will move to other states, along with the job creation and economic value that follows.

I don’t pretend to have all the answers to California’s fiscal troubles, but I’ll leave you with one statistic as food for thought.  In a recent blog, Fareed Zacharia pointed out:
In 2011, California spent $9.6 billion on prisons, versus $5.7 billion on higher education. Since 1980, California has built one college campus; it’s built 21 prisons. The state spends $8,667 per student per year. It spends about $50,000 per inmate per year.”
Clearly something went wrong with our state’s priorities and it’s about time this crisis got the attention it deserves.

The Future of Venture Capital

This week I graduated from the Kauffman Venture Fellows program.  It was a proud day for me and my mentor in the program, Will Rosenzweig.  The Kauffman Fellows program is designed to develop future leaders of the venture capital industry and share best practices in entrepreneurship and innovation. Since its creation 14 years ago, graduates from the Kauffman program have collectively made $6 billion in venture capital investments, creating hundreds of new companies, which generate $15 billion in annual revenues, and have generated 50,000 jobs.

The subject of this posting is the makeup of my Kauffman class, the topics we discussed at yesterday’s Affinity Graduation Day and how these portend to the future of the Venture Capital industry.  With 29 Fellows, my graduating class is the largest and most diverse class of Fellows in the history of the Kauffman program.  The fellows represented venture capital firms from 10 different countries and 8 different US states.  These included the traditional innovation regions of San Francisco, Boston and New York, high growth, emerging economies like China, India, and Brazil, and countries with nascent venture capital industries, such as Mexico, Italy, and the Palestinian Territories.  The fellows also represented a broad range of venture capital investment models from Incubation to early stage Angel and Micro VC, to traditional VC, to Secondary Investors and Venture Philanthropy.

This amount of geographic and investment model diversity is relatively new for the Kauffman Program.  As the chart below shows, for the first 8 years of the program all the Kauffman Fellows were based in the US, and 80% worked in San Francisco and Boston.  In the last few years, only 60% of the fellows were US based and only 40% worked in San Francisco and Boston.  It was announced this week that the 2011 incoming class of Kauffman fellows will continue this trend and be the first class with less than 50% of the fellows working in US based firms.

This growing diversity reflects the fact that venture capital and entrepreneurship is now intrinsically a global business. For example, even though my firm, Physic Ventures, invests exclusively in US based companies, nearly half our portfolio has business activities in Europe or Asia.  These include manufacturing products in China, performing R&D in India, and outsourcing software development to Eastern Europe. This is a profound change for the Venture Capital industry.  When the Kauffman program began in 1996, most VCs only invested in companies within an hour’s drive from their office.  Entrepreneurs and service providers were clustered close by and beta customers were also local.  These days, the global reach of the internet, the low costs of outsourced R&D and manufacturing, and the emergence of entrepreneurial talent around the world means that, while venture investing remains mostly a local activity, every startup needs to have a global perspective from day one.

In additional to geographic diversity, the other key topic of yesterday’s graduation day was the growing diversity in how companies are financed at inception and new ways for VCs to exit investment positions to return capital to their LPs.  I moderated a panel where Blair Garrou described the successful Micro VC model that his firm, DFJ Mercury, has developed for investing in capital efficient, early stage IT and science companies.

On the same panel, Eugene Song from W Capital described the rapid growth of secondary funds who purchase both individual investments and subsets of portfolios of direct investments.  In the last few years, this secondary asset class has grown from a niche asset class to deploying over $10B in 2010.  This growth in secondary transactions is driven by the need for alternative ways to monetize investments in an era when it is taking more time for US ventured-backed companies to reach an exit.  In 2010 the median time from first investment to IPO reached 9.4 years, the longest on record.  When compared with an equivalent time to exit of only 2.6 years in China, it is easy to understand the current enthusiasm to invest in Chinese funds.

Saed Nashef

Finally, I want to take a moment acknowledge one of the many exceptional people in my Kauffman class.  Saed Nashef joined the Kauffman program two years ago with the goal of starting a new venture capital firm in the Palestinian Territories.  Like many of my classmates I thought this was an admirable goal, but in the dark days of 2009 when half the venture firms in silicon valley couldn’t raise capital, I doubted many LPs would be willing to take the risk of investing in a first time fund, located in the West Bank.  Well, Saed proved us all wrong and earlier this year, Sadara Ventures announced it had raised $29MM and is open for business, making its first investments in West Bank based IT firms.  Saed was selected for the 2011 Jiff Timmons award for Entrepreneurial Leadership by his classmates – a most fitting and deserved award for someone who embodies the very best of the Kauffman program and is an inspiration to us all.

The Thiel Fellowship sends a misleading message about the value of university education

Yesterday, the Thiel Foundation, created by legendary investor Peter Thiel, announced its first class of “Twenty under Twenty” Thiel Fellows.  These $100,000 fellowships have been awarded to elite High School and College students who will use the fellowships to either forego college or “stop out” of college to pursue entrepreneurial projects in science and technology.

In the current climate of rapidly escalating tuition costs and high levels of unemployment among recent college graduates, the announcement of these fellowships has re-ignited a broader debate about the value of a college education.  However, as I discuss below, these Thiel Fellowships do nothing to address the problems in our higher education system.  They also send a dangerous message to the vast majority of students for whom a solid University education is still extremely good value.

The Thiel Fellowship is solving the wrong problem

The recently announced inaugural class of Thiel Fellows is a group of highly talented, motivated and accomplished students.  They represent the elite-of-the-elite in terms of ability and achievement.  I have no doubt that each of these individuals will be successful in their careers and contribute to societal progress and economic development.  If these students feel that spending four years at University learning the fundamentals of their fields of pursuit is not the best use of the next four years of their lives, I’m sure they are well qualified to make that decision.

For the record, I strongly disagree with this decision.  I spent six years studying for a BA and Ph.D. in Physics at the University of Cambridge.  I attribute the success I have had in my career to the fundamental knowledge and skill sets I learned at Cambridge.  A University education provides a grounding in the fundamentals, but it also provides so much more.  I value equally highly the interactions and debates I had with my fellow students and Professors, the academic rigor I learned to apply to problem solving and the character I built studying for six years in an ambitious, competitive “incubator” like Cambridge.  In my opinion, there is no short cut to this learning and maturation process.

However, whether a few elite Thiel Fellows choose to eschew a formal University education is not the point.  The reason that the US is dropping in international competitiveness and despite 9% unemployment there are still insufficient scientists and engineers to fill available positions in the US is because far too few students are pursuing these degrees.  Unlike their peers in China and India, where Science and Engineering are the most popular degree subjects, far more American students opt to study Business, Accounting, Marketing, Law etc.  There are many reasons that US students are not studying Science and Technology.  These subjects are viewed as technically rigorous and Science and Engineering students typically don’t begin their careers with the same high salaries offered to Business and Law students.  Therefore, opting to study Business or Law is seen by some students as a short cut to greater wealth.

These new Thiel Fellowships send a dangerous message to high school students that there might be an even easier short cut to success and wealth – they don’t need to study for any degree at all, just start a company and you can be the next Mark Zuckerberg.

If we learned one thing from the recent financial crisis, it’s that there are no short cuts that work for long.  Too much financial engineering rather than actual engineering will end in tears.  Speculating on increasingly leveraged housing stocks is not a sustainable short cut to financial success.  Similarly, stopping out of college to start a social media company is not a sustainable path to long term career success for all but a tiny, tiny fraction of the population.  High school students need to appreciate that studying hard in rigorous subjects, like science and engineering, leads to marketable job skills and long term career success.  It doesn’t prevent students from pursuing entrepreneurial endeavors after college – rather it gives them the fundamental grounding to do so.

Science and Engineering is not the same as Social Media

The second point about the Thiel Fellowship that concerns me is that, in addition to the expected social media business ideas proposed by these fellows, many of the fellows plan to pursue entrepreneurial endeavors in scientific fields such as synthetic biology, solar energy, and space exploration.  These are technically sophisticated fields, built upon deep science and engineering foundations.  Given my science background I am obviously biased, but in my opinion starting a technology company is not the same as starting the next social media company.

Most technically talented students can buy a copy of “Ruby on Rails for Dummies” and “Object-C for Dummies” and put together a rudimentary social media website and accompanying mobile app in their bedroom over a weekend.  In fact, I recently did this and it was great fun.  I do not believe that reading “Synthetic Biology for Dummies” qualifies even the most talented student to setup a lab to produce bio-pharmaceuticals or cellulosic biofuels.  Similarly, reading “Quantum Mechanics for Dummies” doesn’t qualify even the brightest high school student to develop a higher efficiency solar cell material in their garage.  There are certain fundamental scientific concepts and foundational experiments that any young scientist needs to learn and perform before they can start a company and develop a technology.

Much has been made of how the Thiel Fellowship will find the next Gates, Jobs, or Zuckerberg.  Even in the fields of software and social media, it’s difficult to add many more names to this list.  In science and engineering, the list of people who made it to the pinnacle of their fields without first completing a degree is even shorter; Albert Einstein is the exception which proves the rule.

What’s the rush?

Finally, when I read about these teenage wunderkinds starting new science and technology enterprises, I find myself asking, what is the rush?  If I had one question for each of these Thiel Fellows, it would be – Is your entrepreneurial idea so good that you have to do it now?  Will it be scooped or stale by the time you graduate college? – and if you were smart enough to come up with this idea this year, won’t you come up with an even better idea after college, once you’ve learned some science and engineering fundamentals?

In sports there is always great debate about whether Kobe should have played college ball for a couple of years, or whether Andrew Luck should “stop out” of Stanford and join the NFL draft.  For these sportsmen there is the risk that they could suffer a career ending injury during college that could cost them millions in lost income.  They also know that the career of a professional sportsperson is short, so they need to make the most of it.

Neither argument applies to science and technology entrepreneurship.  I’ve never heard of a career ending injury incurred during an undergraduate science laboratory.  Also, no-one is suggesting that entrepreneurial careers are getting shorter.  High school students today are unlikely to qualify for a social security paycheck for at least 50 years.  Isn’t it worth spending the first four years of that 50 year career learning the fundamentals that will stand you in good stead for the next 46?

In conclusion, it is time for a debate on how best to educate the next generation of American scientists and engineers.  We need to ensure maximum access for our most talented students to the best possible education.  Stimulating their research, innovation and entrepreneurship is key to US economic growth and to solving the huge problems facing our society such as healthcare, energy supply, and climate change.  In my opinion, suggesting that some of our most talented students are best served by skipping a University education is not the way to start this debate.