Dr. Henry T. King, Jr.
DR. KING: Let's start our first session. I will call on David Morgenthaler first. Your remarks I wanted to--you have got all the details on David Morgenthaler, in his bio, and also my Canadian friend, Douglas Barber--it is all in the bio data. But I just want to repeat one or two things. He is the founder of Morgenthaler Ventures, a 39 year-old venture capital mega-fund with $2.3 billion under management. David has served as director, chairman, and president of more than 30 companies, and over the last 39 years, he has developed a national reputation for industry leadership and value added venture capital investment. I don't want to take any of your time. I want to hear what you have to say on our opening subject, David. So the floor is yours.
UNITED STATES SPEAKER
David T. Morgenthaler *
MR. MORGENTHALER: Thank you very much, Henry. It is very nice to be with you this morning, and thank you for inviting me. Henry assigned me the topic of the relationship of entrepreneurship to economic growth, job creation, and wealth. This is a subject that is relevant to me as I phase down in the venture business.
The formal venture institutional business really started in 1945, fight at the end of World War II. (1) I came back out of the service and became an entrepreneur at that time. So I have been on either side, as both an entrepreneur financed by venture capital and working with venture capitalists. And for the last 39 years I moved across the table. I stopped making an honest living as an entrepreneur and became a venture capitalist.
Question: How does entrepreneurship relate to economic growth, job creation and wealth? Sadly, the answer is that entrepreneurship is nearly everything. This was a very hard thing to get our United States Congress to believe back in the early 1970s when we formed the National Venture Capital Association, (2) of which I was very active in the formation, and in getting a lot of the legislation changed as well as the capital gains tax rolled back. (3) At that time, the view of our leaders in the country, and certainly the view of our Congress, was that the big companies were nearly everything; they were where jobs were created, they were where wealth was created, and the little companies were kind of a nuisance. In a way, when I came out of graduate school in 1941, that was the attitude at the time. As we dug deeply into this we finally pointed out this fallacy to Congress and got many of the changes that were needed made. (4) The differences were that the large companies were not increasing employment. (5) In many cases, they were moving their operations, particularly their manufacturing operations, out of the older areas, out of the high cost areas, moving them to the lesser cost areas and subsequently moving them outside of the country. (6) It became very important to understand this phenomenon, and the country was very slow to understand it.
It is the sad fact that entrepreneurship is nearly everything--and this bodes badly for the economically mature regions of the country, and even of the world--because one of the characteristics of a mature region is that entrepreneurship tends to fall off. (7) Now why is this true? And, why is it so little is understood by the leadership of the successful regions (underscore successful) when they are at their peaks and have the most resources to do something about it? Not only do they lose new companies but, more disturbingly, they show that the regions' industries are mature.
To understand this, it is necessary to think clearly about some practical, realistic, and fundamental factors. The first is that economics drive nearly everything. Go back to the discovery of America. Columbus was an entrepreneur (8) with a very difficult personality (9) history tells us--not untypical of entrepreneurs (10)--whose belief that the world was round (11) gave him an opportunity to reach the riches of the Asian markets by sailing West. (12) Columbus was almost a prototype entrepreneur. (13) Such a person believes that he sees a business opportunity and a way to fill it, somehow collects he resources needed, and drives the project through.
The elements listed are like the legs of a stool--omit one, and the stool collapses. There must really be an opportunity--usually called an existing or potential market; (14) a way to fill it--usually called the product or the service; the resources needed--usually called the venture capital; (15) and the person (or people) to drive the project to success--usually called the entrepreneur. (16)
Columbus sought one opportunity but found another: America. (17) What led multitudes to flock to it? It was rich, productive, and tree land, when productive land was wealth. (18) Nobody flocked to the Sahara Desert, where there also was free (19) but unproductive land. (20) Also, in America there was free timber, free furs, and the hope of gold. (21) Of course, freedom from religious and political discrimination, (22) desire for adventure, (23) et cetera, also brought people. (24) But, make no mistake--the desire for an economically better life drove most of it. (25)
The influx of people provided markets, the flexible and relatively free society let people exercise their entrepreneurial urges without much restraint, and the huge country provided the resources. (26) The innovation was the sudden availability of a new, rich, relatively unused continent. In England and Europe most of the land was already owned and planted. (27) Both England and Europe were, relatively speaking, mature, and innovations were becoming more technically based, (28) such as water-powered mills and later steam engines. (29)
In the United States and Canada, the innovations to exploit the vast continental resources continued. (30) First came the canals, (31) which opened the rich soils of the Great Plains to the East Coast and even to world markets (32) for the grains that could be produced so much better in Ohio and the Mid-West than in the flinty soils of New England. (33) The result of the canals was that the cost of shipping a ton of grain from Ohio to New York dropped from $120 a ton to $6 a ton. (34) From New York, cheap ocean transportation (35) made the world markets available and drove the expansion of Midwest farming. (36) The innovation of the railroads followed, enabled by the steam engine, (37) bringing more flexibility and, thus, tying all regions together.
Note the theme of what I have said so far, that economics drives nearly everything, and innovations, of some kind--new beliefs, new concepts, new inventions, new resources, and new ways of doing things--are what stimulate the economics of a region, a country, or even the world.
Not for nothing were the 1,000 years after the fall of the Roman Empire called the Dark Ages (38)--beliefs became rigid (39) and compulsory, (40) and new ideas were frozen out. (41) People like Galileo and others were confined to house arrest and punished for offering new ideas. (42) It was a time of almost total lack of innovation. (43)
But, back to America. The railroads, enabled by the steam engine, tied the country together cheaply and flexibly. (44) Think of what that innovation did! For the first time in the history of the world, man could travel faster than the speed of a horse. (45)
The railroads were quickly followed by a host of lesser but important innovations--the telegraph, the telephone, electrical lighting to replace kerosene lighting. (46) John D. Rockefeller got rich on kerosene. (47) He didn't get rich on gasoline; it was the lighting empire that built the Standard Oil wealth. (48) Gasoline in the beginning was a dangerous and unwanted by product. (49)
Other lesser innovations: skyscrapers were enabled by the innovation of the elevator; (50) electrical power came along and replaced the water wheels. (51) The reason New England was the center of the wool and manufacturing industry, the weaving industry, was because it had so many small rivers with falls in them, so that you could have water powered wheels, which, through a series of belts and pulleys, opened up the factories. (52) These were replaced originally by steam engines, which meant you could put the factories where you wanted, and then electrical power gave you more flexibility. (53) And there were countless other lesser innovations that gave mankind benefits which he needed or he thought he wanted. The mold board plow (54) made farming the fertile but heavy prairie soil practicable. (55) The cotton gin made that crop useful; (56) and the list goes on and on. Innovations, innovations, innovations! That's the most important word I will use today. And the world has discovered the concept.
Earlier this week I conferred by video conference with a group from Singapore who met in our Silicon Valley office. They were told to call on me by the Singapore Minister of Finance. We manage a large amount of money for the Singapore government. (57) This group, which was from the Singapore National Research Foundation, (58) was put together to coordinate the national R&D, (59) innovation and enterprise efforts of Singapore, and advance its economy. (60) That was stated in their mission. (61) They advise the Research, Innovation, and Enterprise Council, (62) chaired by the prime minister himself. (63) Think of our President or the Prime Minister of Canada personally chairing a research and innovation council! The goal of the group was to understand more of the enterprise eco-system in the U.S., to try to learn what makes the U.S. innovation system so successful, and to try to identify further growth areas for their future programs. (64)
Next week I am chairing a conference in Washington put on by the Science, Technology and Economics Board of the National Academies, (65) which consist of the National Academy of Science, the National Academy of Engineering, and the Institute of Medicine. (66) This is a free conference...