Will the world's greatest startup machine ever stall?

June 20, 2012: 11:40 AM ET

Not likely. Through boom and bust alike, Stanford University has nurtured some of the most disruptive innovations in business and technology. President John Hennessy told Fortune why -- and how.

FORTUNE -- When John Hennessy became the tenth president of Stanford University in 2000, Silicon Valley was at the height of the dot-com bubble. More than a decade later, the Internet has matured and a new crop of companies built on top of it are fueling another investment boom. In a recent interview, Hennessy discussed the boom-versus-bubble question. He also addressed the student-loan crisis, the nuance of educating a generation of multitaskers, and the broader role that Stanford will play in the future of Silicon Valley. A lightly edited transcript follows.

ADAM LASHINSKY: So, I want to start on the subject of costs. And so I've heard the number that an elite school charges about $60,000 a year. I don't know if that's a Stanford number or an average number.

JOHN HENNESSY: I'd say 55,000, all in, books, tuition, room and board. Yeah, that's a kind of reasonable number.

ADAM LASHINSKY: And you've said that the education, at least at Stanford, number one, costs more than that --

JOHN HENNESSY: Yes.

ADAM LASHINSKY: -- and number two, that if your income is below a certain level, then you're going to get a discount all the way up to 100 percent.

So, I want to ask you, first of all, why does an education cost more than that?

JOHN HENNESSY: It's driven by wage costs. Faculty members are well-educated, high income, reasonably high income earning people, as you would find in other places where people have largely graduate degrees.

I think steps to improve quality over time have actually increased costs: smaller classes, more hands-on, more safety net for the students, so if a student is struggling there's somebody to help them out, right? All these things I think have added costs over time. And we haven't had any significant real productivity increases.

ADAM LASHINSKY: Your comment would suggest that the quality of higher education is generally higher now than it was a generation or two generations ago, and I suppose it's a two-part question. To be fair to you as the president of Stanford, first part, is the quality higher at Stanford? Secondly, is the quality higher generally across the United States?

JOHN HENNESSY: I'd say the quality -- the quality is higher at Stanford, primarily because of things we introduced.

So, for example, we introduced a set of freshmen seminars. There's a small seminar. Every single freshman can enroll in one, 15 students and a faculty member, and it's really meant to be an engaging intellectual experience. You meet a faculty member up close, you get to see they're real people, not monsters, you know, all the kinds of things you like. That obviously costs more money. Now, we raise most of the money to support that, but it adds to the cost.

I think in general there was a lack of attention on undergraduate education, and that starting in about 1990 began to see a return to the roots of high quality undergraduate education in the research institutions. So, that's gotten better.

The real struggle that exists right now is for our public institutions. They're in a really tough situation and their budgets are being cut and cut and cut and cut.

And so it may be hard to say that the quality of their education, at best it's leveled out and at worse, particularly if you consider the fact that it may take more than four years to get a degree now, it's actually gone down somewhat.

ADAM LASHINSKY: And so what will give here? If the education costs more than students are paying, and even what they're paying they're going deeply into debt, and this is seen as something of a national crisis, how and where and when do we reach equilibrium on this?

JOHN HENNESSY: So, I think we have a two-part crisis. The biggest piece of it is students who go to school, spend a lot of money, borrow a lot of money, use federal grants, and then don't complete their degree, because they don't have a lot to show for that investment, right?

We've also got the problem of students who spend a lot, who borrow a lot, complete a degree but then can't make anything useful with that.

For the vast majority of students who actually finish their degree the return on investment is pretty good. A recent analysis shows that it exceeds 10 percent a year. So, that's a pretty good return, I mean, be very happy with that return.

I think the problem is we've got to attack the rest of that. That means dealing with why don't students graduate, which I think the biggest problem is inadequate preparation. We send too many kids to college who are not really ready to be in college. And teaching them remedial material at college, at college costs, that's a ridiculous thing to do.

ADAM LASHINSKY: What are going to do exactly about that?

JOHN HENNESSY: I think we're going to use -- I think we're going to have to use technology to attack that problem.

ADAM LASHINSKY: Instead why don't we come together from a policy perspective and send fewer students to college?

JOHN HENNESSY: We might. We might. Maybe we should be sending fewer students at least to four-year colleges. We should be sending more students to community colleges. And by the way, we should make sure they finish their two-year degree. I mean, the community colleges struggle with getting students through, too, many unprepared students, and there's data out there that shows that financial stress, the cost of paying for college is one of the major reasons students drop out. So, we need to address this issue, and I'm hopeful technology can be part of that.

ADAM LASHINSKY: But before I ask you about how technology could be part of it, have we as a country guilted people into thinking that they need a college degree to succeed where they don't necessarily need one?

JOHN HENNESSY: You know, I think you don't necessarily need one, but if I were a young person going out to the workforce expecting to work for the next 40, 45, maybe 50 years of my life, because realistically I think that's what retirement ages will look like 20, 30, 40 years from now, is there great value in a college education when you're going to have multiple careers over that period of time? Probably. And in terms of -- in a time of great economic uncertainty, which is probably what's going to be in the future rather than the certainty we've had, then a college education is probably more valuable. There will be fewer -- you will not be able to get the kind of jobs that will provide the quality of life that most Americans hope for without a college education.

ADAM LASHINSKY: And speaking broadly, not just for Stanford, given the increasing trend towards vocational training in colleges, are we, in fact, giving -- are students, in fact, getting what you and I would consider to be a university education if their training is primarily vocational?

JOHN HENNESSY: So, some institutions have abandoned the notion of a liberal arts education. I think increasingly it's being abandoned, and we have majors which in my mind sound like they belong in the local community college of the two-year program, right --

ADAM LASHINSKY: Which is not --

JOHN HENNESSY: -- fashion merchandizing --

ADAM LASHINSKY: Well, which is not necessarily to denigrate the two-year program.

JOHN HENNESSY: No, no, no, they're -- they're absolutely perfect.

ADAM LASHINSKY: I understand.

JOHN HENNESSY: My expectation out of a four-year degree program is you're going to get something that's going to provide value 20, 30, 40 years, and that's critical thinking, it's learning to read well, to write, to speak well, all those kinds of cores, to operate in the kind of diverse environment that we find ourselves in.

ADAM LASHINSKY: And what percentage of U.S. college graduates do you think are getting that kind of education?

JOHN HENNESSY: I think the majority are still getting that kind of education, but there's clearly been a shift. Look at now the largest major in the country is business.

ADAM LASHINSKY: I didn't know that.

JOHN HENNESSY: It's business administration.

I'm not so sure business administration should be an undergraduate program, and if it is, it should be cast in the context of a liberal arts education certainly because spending four years learning how to do accounting is not what you really want to be doing.

ADAM LASHINSKY: So, you've identified the problem, and agreed that it's a problem, and business administration is a skill, that is not a broad discipline.

JOHN HENNESSY: Right. And I want to educate people, I don't want to just get them -- the skills I can get. The problem with the other problem with the skills is that they're very fleeting and they're ephemeral. They don't have that much time value. So, I can learn that on the spot, particularly in today's world where there's so much information online.

ADAM LASHINSKY: So, what's an example of how we're using technology to improve teaching?

JOHN HENNESSY: So, when we began our experiments with online technology that my colleague Daphne Koller started --

ADAM LASHINSKY: This is at Stanford you're talking about?

JOHN HENNESSY: This is at Stanford.

She said, you know, I teach this large lecture course. There's not a lot of feedback. There's not a lot of interaction. It's a very technical course. Most of the information flow is from me as the instructor to the student, right? It's not a very productive learning environment, and it's not very much fun.

So, she said, I want to try something different. I'm going to record my videos ahead of time, I'm going to ask the students to watch the videos, and I'm going to take that classroom time and meet with the students in groups of 15 and talk about careers, talk about their big classroom project for the year, whatever, but have a much more interactive, engaged environment, the so-called flipped classroom model that we now -- people allude to.

ADAM LASHINSKY: It sounds essentially like it's a Socratic approach.

JOHN HENNESSY: Absolutely.

ADAM LASHINSKY: It's using technology to --

JOHN HENNESSY: Absolutely. It's technology, that more interaction between the faculty member and student, and a different way to convey the factual information that students do need to master in technical courses.

ADAM LASHINSKY: Do the students watch the videos?

JOHN HENNESSY: They do, because one of the things we discovered early on was the videos need to be interactive, they need to have little quizzes in them, they need to kind of lead up to next steps, they need to help them do the homework, and that was a way to get the students to really watch the videos and find them engaging.

ADAM LASHINSKY: You describe a world -- you're an educator and you interact with undergraduates. You describe a world of undergraduates who have increasingly shorter attention spans. And you seem to be resigned to this and to working with that fact. I find this incredibly depressing, and my reaction is we should be working to lengthen their attention spans, not accommodating their short attention spans.

JOHN HENNESSY: Yeah, so I think we should work to lengthen their attention spans and we certainly try to do that through -- we try to do it maybe more outside the classroom than inside the classroom today with assignments, right? So, you get a serious program assignment or you get a serious writing assignment, make them really write 10 pages of material. It's hard work, it takes a long time, and they really have to focus.

I think the other problem is they all think they're the world's greatest multitaskers. They think they're really excellent at it, that they can be doing Facebook, listening to that lecture, and it's all going in there. For me personally if I have to do something really hard like do some writing or do some really deep thinking, I've got to have quiet, I've got to have my focus, 100 percent of my attention to do it.

And so I think what we discovered, my colleague Cliff Nass did an actual experiment, and what he found out, the students thought they were great multitaskers but when you tested them they were not great multitaskers.

ADAM LASHINSKY: This is fascinating. So, I'm so glad you brought up multitasking. I don't know if you have data on this, and if you don't I hope you can generalize. What percentage of a Stanford tenure track professor's time does he or she spend teaching today?

JOHN HENNESSY: Well, it depends on how you count teaching. If you count teaching, the lecture time, preparation time, office time, working with students individually, including for example a Stanford student, a Stanford faculty member probably is spending as much or more time with graduate students as with undergraduates.

ADAM LASHINSKY: All fair, yeah.

JOHN HENNESSY: Probably -- probably on the order of 60 to 70 percent of their time.

ADAM LASHINSKY: And how would that compare with the way it was say when you were a young professor?

JOHN HENNESSY: It's probably similar. It's probably similar, probably hasn't changed very much.

ADAM LASHINSKY: Yet Stanford is at the vanguard nationally of having its professors be involved in other activities. You yourself are on the board of several publicly traded companies, but you're not unique. Many of your colleagues do things outside the university.

Now, they do this I assume because it's an enriching experience intellectually and also it's enriching financially, including for you for the public boards that you sit on.

JOHN HENNESSY: Sure, sure.

ADAM LASHINSKY: Aren't you essentially setting a bad example? You are a multitasker as well?

JOHN HENNESSY: Well, we allocate -- we tell faculty members you have one day a week out of what we suppose is a six-day week to go spend on external consulting activities or other things, right? Most people don't make full use of that one day a week, they take less than that, but I think we've found over time that that's a productive learning engagement for our faculty and for faculty in tech areas or science or other areas who are engaged in industry in some way, that they -- it really does enhance the quality of their teaching and their scholarship.

ADAM LASHINSKY: Is there any concern over time that with faculty having outside consulting arrangements that are financial remunerative that their hands are going to be tied in any way of speaking truth to justice, teaching impressionable young people and disagreeing with ideas that may be in conflict with their other activities, and how do you approach it, how do you police it?

JOHN HENNESSY: No, there absolutely is concern about that. So, we have a set of conflict of interest regulations that require you -- for example, one thing you can't do is have an outside relationship with a company and also have a relationship inside the university where the company maybe is funding your research, because it just leads to too many entanglements and uncertainties.

We don't allow a faculty member to have one of their graduate students working for them outside the university, because again it leads to too many complications of who owns what and whose work is dictating what gets done.

So, I think first of all we try to make transparency the number one rule so that this is completely transparent. We limit how much time people can spend at companies, or including how long can they be gone if they take a leave, for example, from the university, right, how long can they be gone, because we really want their mental attention at the university when they're on duty there.

So, we have had to pay a lot more attention to it I think than we did in the past, particularly as it's happening a lot more than it used to happen. And that's something I think we have to and we're trying to balance. There's clearly some real value here. So, we try to keep the value while avoiding the conflicts that, as you say, can happen.

ADAM LASHINSKY: You know, you're an electronic engineer. I fear maybe these questions -- this line of questioning would be better for a political philosopher on the faculty at Stanford. I just wonder if we aren't -- if we haven't become a nation of multitaskers, and we are clearly -- we appreciate the benefits of it on the one hand, and we're clearly frustrated by that on the other hand, and we don't like it in our young people.

JOHN HENNESSY: Yeah. Well, and I think -- I think getting to that one thing I think you've hit the nail on the head on, we are as a society much less able to engage with something that requires deep sustained thinking. Look at the way we do politics in this country. We don't think about the really hard problems the country is facing, we look for little sound bites that try to characterize things.

And I think one of the things we try to do in college is at least get to that, get the students to the point where they'll take something and read it in depth and really be able to converse with it in a deep way, that kind of critical thinking, being able to tear something apart, being able to make the arguments or to criticize the arguments on a particular thing. That's a key value we try and install in students.

ADAM LASHINSKY: So, flipping from criticizing this with a small "c" to admiring and praising Stanford's rich tradition in this regard, you yourself early in your career helped found a very successful company. Google was founded by Stanford graduate students, Yahoo! was founded by Stanford graduate students. What are some things that both graduate students and faculty are working on right now in the commercial sector that you're aware of that would be interesting for us to follow in years to come?

JOHN HENNESSY: Well, I think, you know, social media is still in its early days and we're just really beginning to explore different ways of doing that and thinking about what impact it may have and ways in which we can do collaboration. Certainly on online education I think the socialization of online education is going to be a really critical thing. Students learn a lot from one another. So, trying to take that into the context of the virtual world, not just a contained classroom, and ask how we do that, so we have a lot of faculty experimenting with that.

If you look at the problems we have with technology, we've done an amazing set of things with technology, but if you look at it, we've not done a terribly good job on privacy and on people being able to control privacy. We've not done a terribly good job on security. I think all of us would admit that if somebody was really determined they could probably break into most of our accounts and most of our devices. So, we've got to do some really deep work on security, and we've got a really hard problem there, because doing security that is really strong but doesn't make it really difficult to use your devices and your programs is a very hard thing. So, we've got a bunch of faculty working on that problem, and I'm hoping they're going to get a real breakthrough on it.

We've got to get better productivity on software, figure out how we get better productivity, and we've got to figure out how to use -- increasingly we've got these multicore parallel machines. We really don't know how to use them. We really don't know how to use them effectively from a software viewpoint. So, we've got to make some real important research investments.

I'm also excited about the whole area of machine learning. Machine learning is what AI was always after; it just didn't quite know that that's what it was after. But if you look at what's happened, we've now demonstrated some areas where machine learning does a better job than any algorithmic approach you could possibly think of. And, of course, it's good at solving the kinds of problems that are very vague: how do I navigate in the world, how do I recognize a friend, how do I figure out that that picture is actually my best friend there and find it online, all these kinds of things that are very hard to define precisely if you try to do it algorithmically, but if you try to do it probabilistically with a machine learning technique you can actually do it. So, I think we're going to see lots of interesting things from machine learning.

ADAM LASHINSKY: And what do you make of Peter Thiel's thesis, and I believe Peter is a Stanford graduate --

JOHN HENNESSY: Two-time degree holder.

ADAM LASHINSKY: Two times. Okay, good.

And he's a very successful technology investor, but his basic thesis is that we're not really inventing anything of any great value to society these days, that previous generations sent man to the moon and we're inventing an iPhone that you can talk to, which by the way is run by another Stanford graduate, Scott Forstall of your Symbolic Systems program.

JOHN HENNESSY: Right.

ADAM LASHINSKY: Do you agree with him, do you disagree with him?

JOHN HENNESSY: So, here's the good and the bad news. Look, I've been in the computing business -- I got into it in a time when the big companies were called DEC and IBM and they were all on the East Coast, and if you really wanted to go talk to anybody in the computing business and you were in California the first thing you did was get on a plane, right? And I watched this whole revolution occur.

Certainly the impact you could have in the field with a discovery in the 1980s was gigantic, because the field was so small. Nobody was using e-mail, right? A bunch of people in the academia are using e-mail, but nobody is using it, right? There is no web, there is no online presence, there are no great smart phones. Now we've got this giant industry.

Now the question is, if your discovery changes even the angle, the trajectory just a little bit, but you're changing it for millions, billions of people as opposed to a relatively small community that we changed before. I think we just have to accept that's part of what's happened with this -- with this technology.

We're going to invent some more things. We will invent some more things, and I think we'll make some more breakthroughs. They'll be harder than they were in the past, because we've made so much progress.

ADAM LASHINSKY: In computing.

JOHN HENNESSY: In computing the easy problems are done, but you know what -- I'll give you an area where if we could make a major breakthrough in battery technology, and I mean a major breakthrough, factor of 10 improvement in current density in batteries, it would be transformative. Electric cars would be everywhere, we'd get rid of these old vehicles, we'd have cleaner air, we'd reduce our dependence on foreign oil, it would be a great thing. There are people working on that problem. It requires a fundamental reconception of how you design a battery.

ADAM LASHINSKY: And your assertion would be that that would be of the magnitude of sending a man to the moon or curing polio or --

JOHN HENNESSY: Absolutely.

ADAM LASHINSKY: -- not just making it more fun to play a videogame on a mobile phone?

JOHN HENNESSY: Yeah. I mean, sending a man to the moon, you know, there were some really hard parts to that problem but there were not so hard parts, right? I mean, in some areas the technology used was quite simple, computing, for example, right? In other areas it was really tough because you had to figure out logistics. It's easy to send them there, it's hard to get them back; that's the problem.

But, you know, I think -- look at AIDS. I mean, AIDS is a really tough problem to combat, and we're putting all our brains against it.

I think you're going to see major breakthroughs in personalized medicine so that in the future when you go to the doctor and you've got something wrong, the first thing he's going to do is pull up your DNA sequencing and say, okay, I know this drug will work for you and this one won't, therefore we're going to put you on that drug.

ADAM LASHINSKY: And your colleagues at the Stanford Medical School are working on this as well?

JOHN HENNESSY: Absolutely, people are working really hard on it.

ADAM LASHINSKY: I want to end with a completely superficial question, which is to what extent do you -- and have you ever given any thought to the fact of what level of Stanford's success is attributed to the weather?

JOHN HENNESSY: (Laughter.) Somebody once -- I was on a roundtable with Eric Schmidt, and somebody asked, well, why has Stanford been so successful, and he says it's the weather.

So, you know --

ADAM LASHINSKY: Eric said this?

JOHN HENNESSY: Eric said it.

To some extent the weather helped, and, you know, there's a fascinating historical story. Fred Terman, who's widely considered as the father of Silicon Valley, was the person at Stanford that put Hewlett-Packard together --

ADAM LASHINSKY: Right, he was the professor.

JOHN HENNESSY: -- started the -- he was their professor, started the industrial research park, started online education at Stanford, I mean, really phenomenal guy, was the dean of engineering and then the provost for many years.

He was an MIT faculty member who came back to Stanford because he had some asthmatic lung problems. He came back to get to drier, warmer weather.

So, it certainly has impacted things over time. I mean, why not live in someplace that's nice?

On the other hand, the Valley and Stanford are now its own magnet, and they're self-reinforcing. They're symbiotic. People come to Stanford. One reason people come to Stanford, for particularly graduate level engineering, computer science, is because of its relationship with the Valley. One thing -- one reason people come to the Valley is the kind of intellectual life, the vitality that the university injects to the community. So, it's a great symbiotic relationship.

ADAM LASHINSKY: I guess Silicon Valley as we know it, it's not really a place but it's been around for, what, 40, 50 years now?

JOHN HENNESSY: Yeah, 50, 60 years, HP a little over 60 years old.

ADAM LASHINSKY: And it goes in some very pronounced cycles.

JOHN HENNESSY: Absolutely.

ADAM LASHINSKY: So, I'll sort of ask you a two-part question, and one is sort of the parlor game is, are we in a technology boom or a bubble right now, and however you answer that, how does Stanford play into the ecosystem of the cyclical nature of Silicon Valley?

JOHN HENNESSY: So, I think Silicon Valley is cyclical not only around the economic IPO issues but it's also cyclical in terms of waves of technology that come through.

ADAM LASHINSKY: Right.

JOHN HENNESSY: So, you know, early on it was about micro-electronics, then it was about the emergence of the personal computer, then the Internet with Cisco and then Yahoo!, the web, Yahoo! and Google, and then social media, right, with all the things that came along there. Each one of these injections of technology gets a new round of activities and new companies, even new industries started I think you can say. So, that's an ongoing process.

You know, I think we may be in bit of a bubble. I don't think it's as catastrophic a bubble as it was in '99 to '00. I mean, that was a really -- everybody wanted to start a company, and the technology was secondary to the idea of starting a company, right, and that's bad. And we try to tell our students, you know, you want to start a company, tell me what your really great discovery and invention is first, start with that, and we'll work from there.

And I think it goes back and forth. The key role that Stanford plays is it generates the new ideas, it generates the new activities, and not all the time, sometimes they come out of industry, sometimes they come out of the university. But the university will constantly inject new things into that and keep the Valley going and keep it vibrant, which I think is what the role of the university should be.

We're not the people that develop the next version of the iPhone or whatever, we're the people who develop the product that nobody thought of, the concept, the discovery that nobody has made yet.

ADAM LASHINSKY: And your people have done it really well for a really long time.

JOHN HENNESSY: We try to keep the innovation flame going.

You know, the advantage of a university is it brings in really great talent from around the world in these students. They're really smart, they're really clever, they're really innovative. They come not only from across the United States, from around the world, and they really want to make a difference, they want to make a contribution. And they graduate, so it's very easy for universities to kind of get ideas out there. We send them out with the students.

ADAM LASHINSKY: And it's been fascinating whether it was luck or maturity or insight that Stanford never was particularly overbearing about making sure that it capitalized financially on the ideas that germinated on campus, whether through students or faculty members, right, and it has worked out so well for Stanford because its graduates are grateful for the experience and have given a lot of money.

JOHN HENNESSY: Yeah, I think we like to remind people the purpose of a technology transfer office is actually to transfer technology, not to extract a toll tax.

ADAM LASHINSKY: Interesting.

JOHN HENNESSY: But, you know, one example I like to give people is think of the most money you could have charged Hewlett and Packard for their little discovery that they took out and started a company with, think of the most money. Multiply by 100,000 times and you'll begin to get an idea of the scale of their philanthropy to the university over many years.

So, we believe in that symbiotic relationship, we believe that if we're good to people they'll give back, and we can make something that works, and we won't be inhibiting the flow of technology, which I think is a really crucial thing, because in the end that's our long term contribution to society.

ADAM LASHINSKY: Thank you again.

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About This Author
Adam Lashinsky
Adam Lashinsky
Senior Editor at Large, Fortune

Adam Lashinsky is a San Francisco-based editor-at-large for FORTUNE, covering Wall Street and Silicon Valley. Lashinsky joined FORTUNE in 2001, after two years as a contributing columnist. Prior to joining FORTUNE, Lashinsky covered Silicon Valley for TheStreet.com and The San Jose Mercury News. A Chicago native, Lashinsky holds a B.A. in history and political science from the University of Illinois at Urbana-Champaign.

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