In short, the federal money that poured into Silicon Valley was due to a fear of Soviet domination in science and engineering. In the same manner, that fear led to massive increases in defense and science budgets in the United States in the postwar years. Noticing these trends, the engineering dean at Stanford University during this era, Dr. Frederick Terman, fought both to bring in federal grant money as well as to encourage private enterprise ('start-ups' in today's parlance) in the region. Terman had a dream of developing long-standing relationships between universities and the federal government, specifically the military sector. Likewise, he nurtured faculty relationships with tech and defense companies and encouraged them to consult for the same companies.
Terman's efforts marked the birth of a new kind of relationship between a university and the private sector, public-private partnerships, the notion that an ostensibly not-for-profit university might have interests in cultivating private industry profits. Though now public-private partnerships have made collusion between industry and higher education more common, at the time, this relationship was unprecedented. [...]
Faculty members commonly invest in start-ups launched by their students or colleagues. There are probably more faculty millionaires at Stanford than at any other university in the world. [Stanford President] John Hennessy earned six hundred and seventy-one thousand dollars in salary from Stanford last year, but he has made far more as a board member of and shareholder in Google and Cisco. And very often, the wealth created by Stanford's faculty and students flows back to the school.
Terman's efforts spawned a legacy of strange relationships between entrepreneurial students and Stanford faculty - a nepotistic web that many see as inappropriate for a university that, though private, is as a nonprofit supposed to act in the public interest and good. Besides the wealthy professors, the university had benefitted tremendously from its situation at Silicon Valley's center: $1.3 billion worth of royalties have augmented its endowment, harvested via inventions by students, faculty, and researchers.
quote from an article by journalist Ken Auliffe