The History of Silicon Valley: Transistors, Stanford, and Venture Capital
Part 1 of a 2 part series on the circumstances that gave birth to the world’s current hub of innovation — Silicon Valley
- William Shockley invented the transistor in Bell Labs. The transistor is the early version of the integrated circuit which powers all modern tech.
- He then left to create Shockley Semiconductor in California and recruited top engineers to help him.
- Shockley Semiconductor was the birth of the Semiconductor industry, home to companies like Fairchild, AMD, and Intel.
- At the same time Fred Terman came back from the military and transformed Stanford into a hub of tech innovation.
- Stanford students are encouraged to use their engineering knowledge to create real world companies.
- Silicon Valley understands the value of both collaboration and communication, supporting faster flow of ideas than anywhere else.
- The Venture Capital industry gets its start in Silicon Valley. High returns from early firms inspired more money to come out to the valley.
The ‘Silicon’ in Silicon Valley
In 1940 William Shockley invented the transistor at Bell Labs. Soon after, he realized that he couldn’t go any further at Bell and went off to figure out what he wanted to do next. After some time at Caltech and in Washington DC, he decided that he wanted to start his own company.
Shockley then set off to recruit top engineers from all over the country to come work for him. In 1956, he had staffed his company, and they officially opened for business.
Despite being a brilliant inventor, Shockley was never well liked as a manager. In 1957, just over a year after the company was founded, eight employees simply couldn’t work for him anymore. In September the “traitorous eight,” as they became known, resigned.
The next day these 8 men signed a contract for $1.3 million with a New York firm called Fairchild Camera and Instruments to create Fairchild Semiconductor. Fairchild was dedicated to building transistors the way they wanted to, not the way Shockley decreed.
The eight men were Julius Blank, Victor Grinich, Jean Hoerni, Gene Kleiner, Jay Last, Gordon Moore, Robert Noyce, and Sheldon Roberts. Some of these men later went off to create Intel, AMD, Nividia, and Kleiner Perkins.
Transistors had become commonplace in everything from radios to phones to computers, and now manufacturers wanted something even better. Sure, transistors were smaller than vacuum tubes, but for some of the newest electronics, they weren’t small enough.
After a transistor was made it had to be connected to wires and other electronics. This meant that transistors could not be smaller than something a person with tweezers could handle.
Two men found the solution to this problem at almost the same time. Independent from each other, Jack Kilby and Robert Noyce realized that all parts of a circuit, not just the transistor, could be made out of silicon. If it could be done then the entire circuit could be built out of a single crystal — making it smaller and much easier to produce. While Kilby had hammered out the details of making individual components, Noyce thought of a much better way to connect all of these parts. And thus, the integrated circuit was born.
The silicon used in the integrated circuit is where Silicon Valley got its name. The integrated circuit’s mass production capability, reliability, and building-block approach to circuit design has ensured their rapid adoption. Integrated circuits are now used in virtually all electronic equipment including computers, mobile phones, and most other modern technology,
Fred Terman’s Innovation Engine
As with many technological innovations, electronics started with the war. During World War II Fred Terman left his teaching position at Stanford to lead a 850 man radio research lab at Harvard University.
As the leader of the top-secret military mission, Fred Terman was privy to the most cutting-edge, and exclusive, electronics research in his field. As the war neared its end he realized:
“War research which is [now] secret will be the basis of postwar industrial expansion in electronics…Stanford has a chance to achieve a position in the West somewhat analogous to that of Harvard of the East,”
After the war, he lured some of the best students and faculty to Stanford by securing sponsored projects that helped strengthen Stanford’s reputation in electronics.
This focus on pushing colleagues and students to commercialize their ideas helped jumpstart engineering at Stanford. Eventually, Stanford’s reputation grew to become a military technology resource, right up there with Harvard and MIT.
But Terman’s advocacy of technology commercialization went beyond the military. Terman pushed to build the Stanford Research Park, a place reserved for private, cutting-edge tech companies to lease land. It was the first of its kind, and famously housed early tech pioneers like Lockheed, Fairchild, Xerox and General Electric.
You might say that the Stanford Industrial Park was the original networking hub for some of the brightest minds of technology, merging academia and industry, with the goal of advancing tech knowledge.
Since then, Stanford’s bridge from the university to the tech industry has been strong, inspiring an entrepreneurial spirit in many students. The most famous story, of course, is that of Terman and his mentees William Hewlett and David Packard, who patented an innovative audio oscillator. Terman pushed the duo to take their breakthrough commercial.
Eventually, Hewlett-Packard (HP) was born and moved into the research park as the biggest PC manufacturer in the world. Bill Hewitt and David Packard, together with their family foundations and company, have given more than $300 million to Stanford.
Because of their proximity to all of these top innovations, Stanford academics had the opportunity to spot technological shifts in the industry and capitalize by inventing new research breakthroughs, such as computer generated graphics, and a low power GPS system that eventually became Wi-Fi.
An Open System
Many of the founders of companies in the Silicon Valley originally came from the Midwest. Although they may have gone to college and later worked on the East Coast they did not really accept the East Coast formality and stuffiness. They found the casualness of California more to their liking. They also felt freer to experiment with new institutional arrangements in California.
The sense of community that existed among the technical people of the Silicon Valley was not just a pleasant social phenomenon. It enabled Silicon Valley firms to solve technical problems more easily and rapidly than bigger east coast institutions, with many prohibitive laws. This gave Silicon Valley an adaptibility and flexibility that was more important to the survival of the industry than any possible loss of trade secrets.
In his book Angel, Jason Calacanis explains:
The greatest product that Silicon Valley ever built was Silicon Valley, which generation after generation reinvests in and propels itself to ever greater levels of efficiency.
It was mind-blowing to see Google reach 3 Billion dollars in annual revenue in 9 years, until Facebook did the exact same thing, in 7 years. Facebook watched Google march into dozens of markets and dominate, and then they did it in less time.
Airbnb and Uber watched Google and Facebook expand globally and then their management teams memorized those playbooks and improved them. The next group of startups will do the same.
It is very common to see Googlers move to Facebook for more attractive equity packages, taking all of their knowledge of Google’s advertising machine with them. Sheryl Sandberg spent 7 years at Google building up their advertising program before becoming Mark Zuckerberg’s number two at Facebook.
The same is now happening with Facebook employees well versed in their internationalization tactics becoming top executives at Uber and AirBnB.
Unlike many of their east-coast counterparts, Silicon Valley firms understood that collaborating and competing at the same time leads to success. This idea was reflected in California’s law barring noncompete agreements. The ecosystem supported experimentation, risk-taking, and sharing the lessons of success and failure.
Throwing Fuel on the Fire
The launch of the Soviet Sputnik satellite scared the US Congress enough to pass the law, which officially allowed the U.S. Small Business Administration (SBA) to license private “Small Business Investment Companies” (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. Now instead of the government investing in technology, individual fund managers could find and fund these startups.
The first company ever to take advantage of this paradigm shift was Fairchild Semiconductor, founded by the traitorous 8 that left Shockley Semiconductor. Arthur Rock was the principal investor in Fairchild Semiconductor in 1961. His firm, Davis & Rock, is considered the first private Venture Capital firm ever.
There were three other notable firms of the 1960s are Draper, Gaither, & Anderson (1961), Sutton Hill (1964), and Mayfield Funds (1963). All of these firms found massive returns from investing in Silicon Valley technology companies like Apple, Intel, and many others.
In 1969, the entire venture capital community was around 20 men. Like the rest of the valley, these early venture capitalists shared lots of ideas with each other.
In fact, there was a good amount of personnel crossover in these firms. Bill Draper started Draper, Gaither, & Anderson and Sutton Hill. Mayfield Funds was started by Arthur Rock’s partner Tommy Davis.
The flow of ideas between venture capitalists gave rise to many notions currently used by tech investors today, such as focusing on the founder more than the company, and hosting promising entrepreneurs as “entrepreneurs in residence.”
Soon the whole country caught on to all of the money that there was to be made in silicon valley, and the industry started to boom. Giants like Kleiner (1972), Sequoia Capital (1972), and New Enterprise Associates (1978) started to come out of the woodwork, bringing with them more and more money to fuel the creation and growth of high-tech companies.
Part two goes into the birth of the computer industry and the internet, and how Silicon Valley was uniquely positioned to take advantage.
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