Palo Alto Weekly

Cover Story - July 9, 2010

Under siege

Federal funding that has historically sustained Silicon Valley economic growth is threatened

by Chris Kenrick

Stanford University President John Hennessy sounded the alarm in a speech to professors last month: The university faces a "collision point," as federal-government support for higher education shrinks under pressure to fund growing entitlement programs, Hennessy said.

The threat, oft heard but repeated recently with mounting concern, is that the federal largesse that launched and sustained Silicon Valley is ebbing, with potential dire consequences for education, the local economy and, ultimately, U.S. competitiveness across the globe.

"While there remains very strong support (for research), both in the White House and on the Hill, we are coming to a collision point," Hennessy told Stanford's Faculty Senate June 10.

"I think there will be more pressure on higher education than ever, as the amount of discretionary funding in the budget gets shrunk continuously, to protect that piece of it (for research)."

In other words, the massive and ongoing federal support that has created and fueled the Bay Area brain trust — big engineering and medicine at Stanford and the University of California, the NASA Ames Research Center, Lawrence Berkeley and Lawrence Livermore labs, Fairchild Semiconductor, Lockheed Missiles & Space and all that has flowed from those institutions — is under siege.

"For years, money just ran downhill from Washington, D.C., to California and nobody had to do anything to get it," said physicist Scott Hubbard, former NASA Ames research director and now a consulting professor of Aeronautics and Astronautics at Stanford.

"Now, the competition is so much more intense."

Hubbard is something of a historian of the so-called "virtuous circle" of government-university and industry partnership. Those linkages were established locally as early as the 1930s when Washington — worried about a possible invasion of the East Coast — created the Ames Aeronautical Laboratory as "near-clone" of Virginia's Langley Aeronautics Research Center.

As California's research establishment grew, the government money followed.

But competition for funds has intensified with the explosion of entitlement programs and other political claims on the federal budget, not to mention growth of high-quality research in places like Austin, Texas; Huntsville, Ala.; Research Triangle Park in North Carolina and elsewhere.

Hubbard motioned toward a photo of Bay Area Congressional representatives Anna Eshoo, Zoe Lofgren and Mike Honda that hung on the wall of his Stanford engineering office.

"I've urged our local legislators — Anna, Zoe and Mike — to work with the federally funded labs around here to be sure that the money doesn't get siphoned off and go elsewhere."

With the stunning success of some low-cost Internet and software startups, a local mythology has developed around the go-it-alone entrepreneur making it big from his garage.

But that popular narrative ignores the multi-billion-dollar research investments that created historic Valley companies in defense, telecommunications, Internet technology and biotechnology — not to mention the daunting startup costs of newer ventures in clean technology.

Even Google had its beginnings in a federally backed research project by Stanford doctoral students Larry Page and Sergey Brin, who hypothesized that a search engine analyzing relationships between websites would produce a ranking superior to then-existing techniques.

Supported by grants from the National Science Foundation, Page and Brin developed the search engine "BackRub," so named because it checked the back-links to estimate the importance of a site.

Similar government backing — from the Department of Defense — supported the research at Stanford and Berkeley that generated Cisco Systems and Sun Microsystems.

Hennessy, a computer scientist, personifies the local tradition of cross-pollination between local research institutions and local industry. As a 32-year-old Stanford professor of electrical engineering in 1984, he co-founded MIPS Computer Systems, now MIPS Technologies, to commercialize his research in computer architecture.

A quarter century later, government funding continues to play a key role in jump-starting local innovation, which now includes clean-technology ventures.

Tesla Motors of Palo Alto, which marked its initial public offering last week, took a $465 million loan from the U.S. Department of Energy last year.

Photovoltaic systems-maker Solyndra Inc. of Fremont took a $535 million federal loan guarantee last year to augment its venture backing.

"If the federal government were, God forbid, to withdraw critical federal dollars for basic research, Silicon Valley would be grievously wounded," Eshoo said.

"In less than a decade it would not be the place it claims to be today."

In an annual "Silicon Valley Index," Joint Venture Silicon Valley Network for the past 11 years has analyzed a myriad of data to assess the health and wealth of Santa Clara and San Mateo counties.

This year, Joint Venture, in partnership with the Silicon Valley Community Foundation, found cause for concern on many fronts, including the Valley's standing in the race for federal funds.

Silicon Valley's "economic engine has cooled" by measures such as patents, venture-capital investment and office vacancies, CEO Russell Hancock concluded in the February report.

The region "may be lagging behind other regions in federal investments in R&D and procurement, especially at a time when the federal government has re-emerged as a major force in the economy at a level not seen since World War II."

"If anything, we may have lost ground to other regions since the early 1990s," the Silicon Valley Index report stated.

The average annual growth rate for federal procurement is more than 3.5 percent; regions like Washington, D.C., (7.2 percent) and Huntsville (4.5 percent) have attracted increasing levels of funding, while Silicon Valley's levels have declined.

Eshoo bristles at any implied criticism contained in this year's Silicon Valley Index.

She points to the more than $190 million in economic stimulus funds directed to Stanford, including $90.2 million to the SLAC National Accelerator Laboratory. Another $90 million was divided among Stanford schools of Earth Sciences, Education, Engineering, Humanities and Sciences and Medicine.

The U.S. Department of Energy alone, headed by former Stanford professor and Nobel laureate Steven Chu, has spent $130 million on 400 projects in her district alone, Eshoo said.

"It's not that I'm favored; it's because of what's in the district," she said. "The 14th Congressional District is an exceptional place."

For his part, Hancock insists he intended no criticism of Eshoo or her effectiveness.

"She's fabulous; she's done a great job," he said. "But she's done it without our support. We need to support her and make this a big parade."

Stanford's Hennessy, as well as Hancock, have expressed concern that, with mounting pressure on the federal budget, funding decisions increasingly will be made for reasons other than sheer merit, which could threaten research in new enterprises, such as clean technologies.

"I ... worry that under the increasing pressure, there will be more and more tendency to opt for earmarks (government funds identified for specific projects) as opposed to the traditional method of peer review and meritocracy," Hennessy said in his June 10 remarks to the faculty.

"Should that happen, not only would it damage the research leadership we have had in U.S. universities, but also in the long term it will damage economic growth in this country and put us into a spiral that will be quite unfortunate."

Federal investment was far more strategic during the 1960s and 1970s "when we were in a common race, fighting a Cold War, and needing to come up with solutions quickly as a matter of national urgency," Hancock said.

"What's fascinating about that time is that Silicon Valley wasn't clamoring for those funds — they just came here on the merits because this is where the best work was happening.

"When you look at the way funding is being disbursed now, it becomes very clear that every state has two senators.

"I'm not a Silicon Valley booster. I'm a booster of the U.S. of A. But right now what we're doing is taking all these monies — massive amounts — that were identified for strategic purposes, and instead of injecting them very carefully to move the needle in this important fight (for leadership in clean technologies), we're spreading it thinly over every state.

"It has followed a political dynamic instead of awarding the money based on the merits.

"I say, 'Bring it to Boston, Austin, Research Triangle Park and Silicon Valley.

"It's got to be like assembling a team for the World Cup. We don't say, 'How can we do it in a way that's most fair?' We say, 'Who are the best players and how do we get them on this team?'"

Unlike Internet businesses that can be launched and operated from home, new ventures in clean technologies require massive upfront investment, Hancock noted.

"With the waves of innovation in software, you could put your IP (intellectual property) on a disk, put it in a bright cardboard box, shrink-wrap it and count your money. There are no federal approvals required, and no particular economies of scale you have to mount.

"That's why we have 14-year-old kids with acne starting Internet companies.

But cleantech — which transforms the way companies provide energy and consumers use it — operates on a far larger scale.

"They have to be built on massive scale and take place in enormous labs that usually need some kind of federal funding."

Beyond the R&D, such products also will have to run a gauntlet of regulatory hurdles, requiring resources and capital upfront.

"This is going to be much harder, and we can't even begin to contemplate this without the federal government," Hancock said. "They've got to be our partner."

Eshoo needs no reminding about her key role in the mix.

"I hear about it from my constituents all the time — they understand how critical the federal funding, especially in R&D, is. They don't look for it to supplant what their respective industrial sectors do, but they know the role it's played.

"And once you invest in it, it really needs to be sustained," she said.

"This is really all about the money."

Staff Writer Chris Kenrick can be e-mailed at ckenrick@paweekly.com.

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