Terman’s Bargain: How a Land-Rich, Cash-Poor University Helped Seed Silicon Valley

In the mythology of Silicon Valley, everything begins in a garage. The most famous of them stands at 367 Addison Avenue in Palo Alto, a modest structure behind a house a short walk from downtown. In the late 1930s, two Stanford engineering graduates, Bill Hewlett and David Packard, began working there part-time with $538 in working capital, and on January 1, 1939, they formalized their partnership. They decided the order of their names, according to the company’s own history, by a coin toss.

The garage is a fine symbol. But it obscures the figure who made it possible and the institutional decisions that turned a single startup into an industry. To understand the relationship between Stanford and the technology business, one has to look beyond the garage to the dean who encouraged it.

The Mentor

Frederick Terman was a Stanford professor of electrical engineering who later became dean of engineering and provost. He was, by the account of Hewlett-Packard’s own published history, the mentor who encouraged his former students to start a business of their own. He arranged a research position for Hewlett and a fellowship that brought Packard back to Palo Alto.

Terman’s insight was that a university could do more than educate engineers and send them away. It could cultivate an ecosystem in which they stayed, built companies, and in turn enriched the university. This was not an obvious idea in the 1930s, when the centers of American industry lay far to the east.

The garage is a fine symbol, but the foundations of the industry were laid by a dean, a land-use decision, and a long bet on proximity.

The Land Decision

After the Second World War, Stanford found itself in a peculiar position: rich in land and short of cash. The university had been founded on the Stanfords’ vast estate, but the founding grant restricted the sale of that land. Leasing it, however, was possible.

Terman and university administrators saw an opportunity. In 1951, Stanford authorized the creation of what was then called the Stanford Industrial Park, setting aside 209 acres for light industrial use in partnership with the City of Palo Alto. The idea was to lease land to research-focused companies, generating income for the university and tax revenue for the city while bringing technology firms into close proximity with Stanford’s faculty and students.

The first tenant, in 1953, was Varian Associates, a company with close ties to the university, which developed microwave tube technology. By 1956, Hewlett-Packard had established its headquarters in the park. The development was tightly controlled by the university, which screened tenants and imposed design standards intended to preserve a campus-like atmosphere. The name was later changed to Stanford Research Park, reflecting its emphasis on research and development.

It is widely described as the world’s first university research park, and over the decades it has housed a remarkable succession of companies. Its tenants have included Xerox PARC, whose research laboratory there developed influential work in personal computing, along with many other firms. Today the park remains home to the research and development operations of a range of technology companies.

Proximity as Strategy

The genius of the arrangement lay in proximity. By placing companies next to the university, Stanford made it easy for faculty to consult, for students to take internships and jobs, and for ideas to move between academic and commercial settings. Over time, that proximity produced a culture of exchange that became one of the defining features of the region.

The model has been widely imitated, with research parks springing up near universities around the world. Few have produced results comparable to Stanford’s, which suggests that the land itself was only part of the story. The rest lay in timing, in the accumulation of talent, in the growth of venture capital along nearby Sand Hill Road, and in a culture that encouraged risk.

The Questions That Remain

The relationship between Stanford and the technology industry has brought extraordinary benefits, to the university, the region, and the world. It has also raised enduring questions. How should a university balance its academic mission with its commercial relationships? What obligations does an institution that helped create enormous wealth have to the communities, including those priced out of the region, that live with the consequences?

These questions do not have easy answers, and The Stanford Chronicle will return to them often. This section will cover the technology industry with the long view that Terman himself might have appreciated: attentive to innovation, skeptical of hype, and mindful that the most important decisions are often not the dramatic ones but the patient, structural choices that shape a place for generations.