The Good and the Bad of Stanford's Massively Successful Startup Scene
(Bloomberg) -- The chances that your startup will become a billion-dollar company are almost zero. But if you do somehow manage to create a unicorn, the odds are better than 1-in-10 that you or your co-founder attended one school: Stanford.
It’s a remarkable statistic even considering its student population is overrun with go-getters -- people ambitious enough to apply and smart enough to get in. More unicorn founders and top venture capitalists attended Stanford than any other U.S. university, according to data compiled by Bloomberg and based on CB Insights’ lists of top venture capitalists and unicorn companies. And while Harvard has spawned more alumni with self-made fortunes of at least $500 million, Stanford’s are 11 years younger on average.
How do they do it? One obvious answer is location. Rather than create a bubble of academia within the heart of the world’s tech mecca, Stanford has embraced its proximity to Silicon Valley to give students a powerful advantage.
Stanford and Silicon Valley are “inextricable,” said alumna Heidi Roizen, a venture capitalist and co-leader of Stanford’s DFJ Entrepreneurial Leaders Fellowship, where she’s on the teaching team. “You have to look at them together.”
While that bond provides students with unparalleled access to mentors, role models and funding, it also comes with problems: startups are prioritized over schoolwork and conflicts of interest arise when professors are also seed investors.
Bloomberg conducted dozens of interviews about Stanford’s startup scene and its perks and perils. Here are some of the people who capture different aspects of the school’s culture.
If you walked into Ryan Breslow’s Stanford dorm room in the spring of 2014, you’d be forgiven for thinking no one lived there -- no pictures on the walls, no clothes in the closet, no comforter on the bed. That’s because no one was supposed to be living there.
Breslow was a sophomore computer science student when he dropped out earlier that year to work on Bolt, his payment startup.
“I just became much more passionate about that than my classes,” said Breslow, 24. He spent the rest of the school year squatting on campus, secretly living in the spare dorm room and getting meals with the help of a dining hall cook he had befriended. Today, Bolt is worth about $250 million, according to Adam Augusiak-Boro, a senior associate at EquityZen, a marketplace for trading employee shares of closely held companies.
At least three members of the computer science faculty are Bolt investors.
Breslow isn’t the only successful Stanford dropout. Take Snap Inc.’s Evan Spiegel, who dropped out of undergrad, or Tesla Inc.’s Elon Musk, who lasted less than a week in his Ph.D. program before withdrawing. One notable alumnus, billionaire Peter Thiel, encourages it so much that he set up a fellowship offering young entrepreneurs $100,000 to put college on hold.
Dropping out is still the exception rather than the rule at Stanford, but taking a year off to work on a startup is so prevalent that there’s a term for it: “stopping out.” It’s also common for students to take a light course load -- only two classes or so -- to spend more time on their startups, Breslow said.
Some companies are born in the classroom. Terry Winograd looks like an academic, with bushy white hair and a mustache to rival Einstein’s. When the former computer science professor first went to work at Stanford in 1973, his intentions were academic, too. Getting crazy rich wasn’t part of the plan, but as fate would have it, he was an adviser on Larry Page’s graduate research project involving web search.
Winograd never invested in his student’s startup, but he was invited to work at Google during a 2002 sabbatical and was largely paid in pre-IPO stock. The company, now called Alphabet Inc., went public in 2004 and is valued at $797 billion.
“I’m not a billionaire,” he said. “But I’m comfortable.”
Winograd recognizes that there’s a downside to the cozy relationship between academia and industry.
“The negative side effects are cultural," he said. “If a student sees their fellow student getting really rich it’s hard to say to them, ‘Yes, but philosophy is important, too.”’
Other computer science professors have taken a more direct approach to profiting from their students’ ideas. David Cheriton, for example, was an early Google investor. The proceeds Cheriton has received from selling his Alphabet stock make up the bulk of his $4.3 billion fortune, according to the Bloomberg Billionaires Index, a ranking of the world’s 500 wealthiest people.
Also in the department is Mehran Sahami, who still teaches at Stanford and famously had Mark Zuckerberg, the Facebook Inc. co-founder, visit one of his computer science classes for Q&A sessions. Sahami has invested in several of his students’ companies, including a mobile payments startup called Clinkle Corp. In early 2013, more than a dozen students in the computer science department dropped out to work with Clinkle founder Lucas Duplan. The company folded about two years later.
“My expectation for the students and Lucas Duplan, who was the CEO, was that they would graduate,” Sahami said.
Sahami said he has invested in fewer than five of his former students’ ventures. “It’s a relationship that’s been built up over years so when they’re ready to do this venture or get funding, this discussion will happen.”
Shortly after the Clinkle exodus, the university added a section to its conflict-of-interest policy, which requires any faculty member involved in a student’s academic program to get permission from administrators before investing with that student.
That doesn’t apply to everyone. “Since they do not have faculty appointments and are not paid by Stanford, our conflict of interest policies do not apply to adjunct faculty, visiting faculty, visiting scholars or visiting lecturers -- unless they have another type of appointment through which they are paid by Stanford,” university spokesman E.J. Miranda said in an emailed statement.
In 2009, just after his junior year, Cameron Teitelman decided to do something about a problem he noticed on campus: a school with so many entrepreneurs had no structured setting for them to connect and work through common problems. His solution was StartX, an accelerator for Stanford-affiliated founders. In 2018, StartX was ranked in the top three accelerators in the country along with Silicon Valley powerhouses Y Combinator and AngelPad, according to the Seed Accelerator Rankings Project. StartX does not call itself an accelerator.
Teitelman, 30, also founded StartX to create a safe space for students who are first-time founders working in Silicon Valley’s shark-infested waters. After hearing stories of students who had been offered unfair deals by their lecturers, many of whom were full-time venture capitalists, Teitelman wanted to help students avoid those situations, he said.
“Sometimes lecturers, I feel like, take advantage of students and it really pisses me off,” Teitelman said. “Venture capitalists who play on information asymmetry to get more out of a startup that doesn’t know anything, that’s just wrong.”
Peter Levine, a general partner at Andreessen Horowitz, introduces himself as an investor first and Stanford teacher second.
Around the same time that Levine started at the venture capital firm in 2010, the business school invited him to teach part time, and he eagerly accepted. More than a dozen venture capitalists are lecturers at the Stanford Graduate School of Business.
“It’s an honor to teach there,” Levine said. “It’s about giving back and providing the expertise that I have.”
Being a venture capitalist surrounded by smart and ambitious student entrepreneurs looking for funding is an added benefit, and he said they sometimes approach him to pitch startups while he’s eating in the cafeteria.
“They know who I am and they know what we do,” Levine said. “Everyone is involved together and they have very close access to investors.”
Business school student Tadia James welcomes professors who want to invest in students.
“They are so generous and really believe in us,” she said. “It’s not at all uncommon for a professor to invest in one of their students, especially after a student has taken their class.”
Teitelman, who studied management science and engineering, stressed the distinction between investments from part-time lecturers and full-time tenured professors.
“For the most part, tenured professors at Stanford are very careful,” Teitelman said. “They first and foremost care about research and a student’s education.”
Even Stanford itself is taking a stake. In 2013, the school founded the Stanford-StartX Fund, which allows the school to invest in StartX companies.
“We train and house these creative minds, and it is only fitting that we invest in their future success,” then-Stanford President John Hennessy said in a statement at the time.
StartX decided to participate in the fund to reach financial self-sustainability and it recently achieved that goal. For that reason the Stanford-StartX Fund will stop making new investments after June 30, according to a statement from StartX.
Stanford finance chief Randy Livingston said the school will continue to put money in the President’s Venture Fund, which for the past decade has invested in new ventures that have licensed technology from Stanford. The school’s Office of Technology Licensing collects royalties when inventions created on campus are successful.
The university has invested more than $150 million in the Stanford-StartX Fund through the end of 2018, Livingston said in an email, 50 percent more than he predicted in a 2013 interview with the New Yorker. That may seem like a relative pittance now for a $26.5 billion endowment, but the odds are good that Stanford is getting in early on the next Google.
©2019 Bloomberg L.P.