We love the idea of the innovative entrepreneur.

We love the story about code being written in dorm rooms, naysayers saying, “It can’t be done!” The overcoming of the obstacles. The “I’ll-show-you’s!” being shown.

The brilliant idea that manifests into profit.

But it’s not real.

The myth of a lone entrepreneur creating innovation is one we hold onto because it makes for a good story. But it’s not a very useful story.

Sure, if you’re interested in luring Harvard MBAs away from Wall Street and into tech, the lone entrepreneur is a useful story. But if you’re interested in building an innovation hub in your city or country, or unseating Silicon Valley and the U.S. from its spot at the peak of innovation, or building a future as technologically revolutionary as the past 50 years have been…well, then you actually need to understand the real story of how innovation works.

Yes, innovation needs entrepreneurs. It also needs risk-taking venture capital. But the most undermined , and arguably most important, factor in innovation is the role of government funding for academic research. Together, these three ingredients have been responsible for some of the coolest tech advancements over the past 50+ years.

Providing STEM PhDs with government funding to conduct research has long been the unsung secret to the United State’s innovation edge. It’s what brought us (along with the tech mentioned above) satellite tv, pacemakers, artificial limbs, the freaking internet, and a list so long that it’s likely unknowable in its entirety.

And the story of how this happened doesn’t start with lone entrepreneurs or risk-taking venture capitalists, it starts with government policy.

And it’s a fascinating story.

Military funding and the history of Silicon Valley

In 1941, the United States had just entered the war against Germany when it decided to make an unprecedented shift and begin funding academic research. Pre-World War II, military research and development was done on military bases. At the start of the war, the United States government established the Office of Scientific Research and Development, the prelude to today’s National Science Foundation (NSF), which specifically aimed to fund research happening in academic institutions.

The first batch of funding, $450 million, for this new initiative was released over the next four years, with top institutions claiming the largest parts of this newly available pie.

Frederick Terman was not happy.

Terman was heading up the engineering department at Stanford, and being awarded the dregs of this newly available funding pool was a painful reminder that the West Coast was still a distant second to the established institutions in the East. While his school was overlooked, Terman himself was recognized as best-in-class, and when a job offer came from Harvard, he packed his bags and headed to Cambridge, Massachusetts. For 4 years, Terman led a team of 800+ people in a secret lab at Harvard, at the time, the pinnacle of the electronics revolution.

But he had a plan.

When the war ended, Terman returned to Stanford determined to never be overlooked for funding again. He convinced 11 former faculty members to join his team on a mission to make Stanford the center of excellence in the leading technology of his time. He convinced the Office of Naval research to give them their first contract, and by 1950, Stanford was considered the MIT of the West.

Terman, along with his colleagues and students, and all the microwave and electronics labs around the country were doing military research on the government dime. They were also inventing the technologies that are foundational in the age of the internet, foundational to the invention of the internet itself. There was no single ah-ha moment and then profit. First, there had to be money for scientists to do science.

Of course, money alone does not create innovation.

Teaching entrepreneurship

In the mid-1950’s Terman started doing something that had never been done before. Instead of encouraging graduate students to get PhDs, he encouraged them to start companies, he encouraged professors to consult for companies and get on board seats, he made licensing incredibly easy. The reason for this was likely personal — Terman didn’t want to build production systems for the government, he wanted to do research. And the result of his decision was something completely new: entrepreneurial education.

Time travel to the present day, we’re back in Cambridge, Massachusetts, this time at MIT, where Joe Hadzima has been teaching entrepreneurship for 30 years. He’s worked with the National Science Foundation, and like Terman, has built his career around filling the gap between research and commercialization — teaching entrepreneurship as a discipline.

Hadzima and his colleagues have been quite successful in this endeavor. MIT alumni have launched over 30,000 companies. The question people have asked him consistently over the years is how they too can replicate MIT’s success. Hadzima’s answer used to be to replicate a recent program that had been successful. He says:

“Then I would run into these people 4–5 years later and ask them how it was going. The answer? Not well. They had copied every program I described. But in the time it had taken them to copy it, the whole thing had morphed. Someone said I was the first person to use the term ecosystem, I don’t know if that’s the case, but that’s how I started to think of it. In a biological ecosystem you can’t put a penguin in the rain forest, and that’s what I was telling them to do.”

Hadzima points to three things that create the “ecosystem” that nurtures entrepreneurial education:

Knowledge of how to do it: This is the legacy of Terman. It aims to teach scientists, research, and other entrepreneurs the basics of product-market fit, customer development, growth strategies. Knowing it can be done. This creates the “flywheel” we see in tech hubs like Silicon Valley, Berlin, and Tel Aviv. Entrepreneurs inspire entrepreneurship. The watering hole. This is the place where people can interact — business plan competitions, a venture cafe, an academic institution.

Today, PhDs graduate from MIT fully prepared to commercialize their findings. Hadzima says simply: “It’s very cool stuff.” It is cool stuff, and it’s a direct continuation of Terman’s legacy.

Today MIT, Harvard, Stanford, along with many other schools around the country receive millions of dollars in federal funding to continue their research. In addition, they have all built out entrepreneurial education programs aimed at helping scientists commercialize their findings.

First, there had to be money for scientists to do science. Second, there had to be an environment for entrepreneurial education. But unlike Terman and his students, today’s entrepreneurs rarely get their first contract from the government. To understand when that changed, we need to once again head back to the Silicon Valley of 60 years ago.

The rise of private capital

Frederick Terman is commonly called “The Father of Silicon Valley,” but he shares that title with another character, William Shockley. History remembers William Shockley a little less kindly than Terman, in no small part because of his terrible skills as a manager.

Shockley had a glowing career — Director at Columbia, invented the silicon transistor (for which he later won a Nobel Prize), and founded Shockley Transistor. It was here where he inspired the exit of “the traitorous 8” who left to start Fairchild Semiconductor. In the next 25 years, Shockley’s company spawned another 65 transistor companies. You might say this is the first appearance of the “ecosystem” described by Hadzima.

And it is here where we arrive at the reason that tech today is not synonymous with government work: Fairchild Semiconductor was the first venture capital backed startup. And in the mid-1950’s Silicon Valley saw its first IPOs:

Varian, 1956

Hewlett Packard, 1957 (founded by Terman students)

Ampex, 1958

And with these IPOs, the lure of profit began to draw the interest of private investors. These first deals were small, ranging from $75k — $300k, and mostly coming from small groups of angel investors. By the early 70’s, we saw the emergence of some names we recognize like — Kleiner Perkins and Capital Management Services (now Sequoia) — but the contribution of these firms was nominal. In 1975 the entire venture capital industry was only responsible for $10 million in funding.

This changed dramatically in the late 70’s. Mariana Mazzucato, author of The Entrepreneurial State writes:

“Indeed, the biggest fall in capital gains tax in US history happened at the end of the 1970s when the National Venture Capital Association managed to succeed in their lobbying for a 50 per cent fall (from 40 to 20 per cent) in just five years. All on the back of a narrative of the venture capitalists being the true entrepreneurs and risk takers…”

With this change, the amount of money in venture capital skyrocketed, and private capital became a became a permanent part of the Silicon Valley landscape, providing reliable funding for entrepreneurs interested in productizing their research.

But increasingly, we have adopted the narrative of innovation being driven by venture capitalists and entrepreneurs. We have forgotten the enormous role that government funded research played in giving us the technology that powers the iPhone, Tesla, Google search, and so much more. And it’s this omission of the contributions made by government funding that most threatens the future of our innovation edge.

The state of innovation

Private investment follows low-risk ventures with the highest probability of returns. steve blank, Stanford Professor, has published volumes of research and blog posts on the secret history of Silicon Valley. He says:

“When venture capital started 50–60 years ago they also funded risky ventures. There wasn’t one place that gave returns. Today venture capital funds smart apps, social media — things that return profits. God bless capitalism.”

Blank isn’t implying this is good or bad. It just is. The closer a company gets to IPO, the lower risk it becomes, and over the years, venture capital money has increasingly followed the lower risk investment. Today, venture capitalists invest $63 Billion in startups, the vast majority of that money going to fund late-stage, internet companies.