Silicon Valley: The Origin Story

The rise of Silicon Valley is one of the most remarkable phenomena in modern economics. Prior to World War II, there was no Silicon Valley. Most of America’s research labs and innovation efforts were all based in the east coast, not in the San Francisco Bay Area. However, within a short period, Silicon Valley became the world’s leading hub for new technologies and start-ups. This is astounding! In no other economy do we this achievement. As a result, governments, policy makers and business professionals all over the world have been trying to figure out Silicon Valley’s model and see whether they can imitate the same story in their own regions. So what’s the origin story of Silicon Valley? How did the valley acquire its name? And how did it become the capital of entrepreneurship in the United States, accounting for more than 50% of all the country’s Venture Capital (VC) funding?

Interestingly, even though there isn’t a single coherent story of how Silicon Valley came to be, there is some consensus that the certain were integral to its success. These elements allowed building a cohesive entrepreneurial ecosystem that helped shape Silicon Valley as we know it today:

Research Center in Science, Technology, Engineering and Mathematics (STEM)
Strong Universities, with Stanford particularly playing a big role
Steady government spending, especially by the US Defence Force, CIA, NSA and NASA
Plentiful venture capital
A culture which encouraged entrepreneurship

Before we go on telling the valley’s story, I want to point out a couple of things. First, the featured stories are mainly based on a lecture given by Steve Blank titled the secret history of Silicon Valley, which is available on YouTube. I highly recommend you look it up. Second, this piece is meant to be an analysis of how Silicon Valley’s entrepreneurial ecosystem came to be and not a thorough academic review of historical events. As a result, you’ll find me oversimplifying some historic events which are not directly related to our story. Now back to Silicon Valley…

Willian Shockley

The valley’s name traces back to William Shockley, credited by many as the father of Silicon Valley. In 1947, Shockley along with a team of researchers invented the point contact transistor. For those who don’t know, the transistor is a semiconductor device (typically made out of silicon) which controls the flow of electricity. The invention of transistors was huge! It is actually the key component which enabled engineers to develop all different sorts of electronic devices which we now use on a daily basis such as computers, phones and TVs, but let’s not get ahead of ourselves. Back to Shockley, after his career in research, he decided to move to Mountain View, California to live near his ailing mother and start Shockley Semiconductor Laboratory, the first company for silicon-based semiconductor devices in 1956.

AS A RESULT OF FAIRCHILD, AN INDUSTRY SPARKED. MORE THAN 65 SEMICONDUCTOR COMPANIES WERE CREATED, GIVING SILICON VALLEY ITS NAME.

Fairchild Semiconductors

Shockley was an intelligent man, a noble laureate and great at hiring talented individuals. However, he was infamous for his horrible managing skills. Shortly after creating his company, eight members of his team “the traitorous 8” got fed up with Shockley and decided to create their own semiconductor company, Fairchild Semiconductors, in 1957. Now in case you haven’t noticed, all this was happening during the 1950’s. At that time, The US was in a cold war with the Soviet Union. The war wasn’t a typical war, as it was fought in peculiar fronts. One of which was outer space, and in 1957, the Soviet Union just launched Sputnik 1, the first artificial satellite successfully launched to earth’s orbit. Sputnik devastated the Americans. It was a major setback in America’s war with the Soviets. With a great sense of urgency, the US government decided to create NASA, with the purpose of preparing the country for the next phase of the Space Race; landing on the moon. NASA’s operation was intense, requiring many high-tech semi-conductor components. Luckily for Fairchild, they were able to build mass manufacturing capabilities of semiconductor devices which was exactly what NASA needed.

As a result of Fairchild, an industry sparked. More than 65 semiconductor companies were created, giving Silicon Valley its name. All of these companies can be traced back to Fairchild Semiconductors and ultimately to William Shockley. Some of these companies are still with us today still leading the technology innovation front such as AMD, Intel and NVIDIA.

Silicon’s History beyond Shockley

The story of Shockley and Fairchild tells us how the valley got its name, but it does not tell us the full story of how Silicon Valley became the global hub for entrepreneurship. In order to get the full story, we need to go back, all the way to World War II. So let’s start by going briefly over some of the main relevant events in WWII.

World War II: The First Electronic War

In September 1939, Germany invaded Poland, World War II broke loose and Germany along with the rest of the Axis Powers launched their attack to invade all of Western Europe. By 1941, Germany successfully took over France and broke its friendship treaty with the Soviet Union, driving the soviets to join the Allied Powers with the United States and Britain. While the soviets led the ground battle on Germany’s eastern front, the US and Britain led the air war over Germany from the western side.

Britain and the US’s war strategy was to disable Germany’s war capabilities by targeting their main war infrastructures. (E.g. manufacturing centers, transportation infrastructure, military bases… etc.). In order to do that, the Allies launched thousands of bombers from the UK set with targets to destroy Germany (Bombers are military aircrafts which carry big bombs designed to attack ground and sea targets). However, what came to the Allies’ surprise, Germany was well prepared. Germany had successfully built a grand electronic defence system made out of radar systems, anti-aircraft artillery and fighter aircrafts.

Germany’s Electronic Defence System
- Early Detection Radars
- Large Scale Radars
- Mobile Radars
- Radars mounted on aircrafts
- Anti-aircraft artillery
- Fighters (military aircrafts designed for air-to-air combat)

The German defence system proved to be effective. The Allies were devastated, losing about 20% of their planes in the first year. The Allies’ air pursuit was becoming too expensive in terms of material and, more importantly, in terms of human resources. Realizing how poorly equipped they were, the US and Britain quickly decided to create advanced research labs with the goal of developing their own electronic offence systems able to dismantle Germany’s defence force. What started as a fleet of basic bombers in 1941, ended as a sophisticated air force with bombers, electronic intelligent systems (ELINT), fighters, complex radar systems and radar countermeasure systems. By 1943, the Allies gain momentum and by 1945, the Allies win the war.

So what’s significant about this war? WWII was the first electronic war. WWII made the global powers realize that technology advancement was the key factor to military superiority. Military power is not dependent only on the volume of machinery and soldiers anymore, but rather the advancement of their scientific and technological infrastructure. The most significant research lab active during WWII was the Harvard Radio Research Lab (RRL), which operated from 1941 to 1945 at Harvard University. The lab was directed by Frederick Terman, professor of engineering at Stanford University. After WWII ended in 1945, Terman moved back to Stanford and this is where things get interesting for the Valley.

THERE WAS NO GOVERNING BODY WHICH OVERSAW THE PROCESS OF BUILDING SILICON VALLEY. TO THE VALLEY’S LUCK, CERTAIN HISTORICAL EVENTS AND KEY INDIVIDUALS CAME TOGETHER WHICH INSTILLED THE DIFFERENT ELEMENTS OF THE ECOSYSTEM.

Frederick Terman and Stanford University

You probably heard the saying, necessity is the mother of invention. Due to the Second World War, humans were able to make significant advancements in radio and electronics, with the Harvard RRL leading the way. However, after the war ended, the lab was dissolved. The director, Frederick Terman, sought to continue the advancement process and was determined to lead it in Stanford. Luckily for him, he got appointed as Stanford’s Dean of Engineering in 1946 and immediately, Terman got to work. He hired 11 ex-HRRL scientists as new members of Stanford’s faculty. Terman got another break; the Cold War. The US government found itself in a second electronic war, and this time it’s against the Soviet Union. Terman quickly realized the gravity of the situation and used his clout gained from the second wold war to direct US government resources towards Stanford. Straightaway, the university worked on building advanced engineering labs, becoming “the MIT of the west coast”. Stanford’s research proved to be effective developing key inventions used during the cold war. Stanford became the main center of excellence for the US Defence Force, the CIA and the NSA. In 1955, Terman becomes Stanford’s Provost.

Now this is where we get to the point which separates Terman and Stanford from other universities. Stanford wasn’t the only research intensive university, but Terman had a unique philosophy. Steve Blank, serial entrepreneur and professor of entrepreneurship at Stanford, highlights the following about Terman:

He encouraged his graduate students to start their own companies instead of pursing PhDs
He encouraged professors to consult for companies and sit in company boards
He made Technology and IP transfer easy
He introduced the mentality that getting out to the real world was good for your academic career, not just professional career

This is when we see Terman start the entrepreneurial engine in Silicon Valley. This is also the point where the two stories, the story of Shockley and Terman, converge. Due to the technological advancements at Stanford and Terman’s influence, a wave of technology companies were established serving different government clienteles such as the military, the CIA, the NSA and, as we mentioned before, NASA. Some of the most notable companies include Hewlett Packard (HP), Litton Industries and Fairchild Semiconductors. Now, you might have noticed that the entrepreneurial ecosystem has started to take shape. However, there is one crucial difference between the Silicon Valley of the 50’s and 60’s and the Silicon Valley of today. Silicon Valley was government driven. At that time, most of the technology companies in the valley were established to serve different government initiatives, mostly related to the Cold War. So how did the valley switch from being government driven to profit driven? This the next part of our story.

Transforming from Being Government Driven to Profit Driven

By the late 1950’s, emerging companies started to go public (such as HP). This caught the eyes of investors. Suddenly, people became interested in the valley and its technology companies. As a result, investors, mainly family funds, decided to create venture capital firms dedicated towards investing in innovative technology startups. Some of those firms are still with us today, most notable of which include Kleiner Perkins and Sequoia Capital. Finally, the US government introduced two policies which proved to be vital in encouraging VC investment. First, taxes on capital gains dropped from 50% to 28% in 1978. Second, pension funds were allowed to allocate 10% of its funds towards venture capital. By the early 1980’s, the Silicon Valley entrepreneurial engine switched from running on government spending towards profit. What’s noteworthy about Venture Capitalists is that they changed the mind-set of their entrepreneurs. VC equity drives on high returns, which in turn, drives entrepreneurs to target national and global markets for maximum profitability. This mind-set is what made Silicon Valley the influential hub for whole global market.

As you can see, there was no governing body which oversaw the process of building Silicon Valley. To the valley’s luck, certain historical events and key individuals came together which instilled the different elements of the ecosystem. What’s also noteworthy is the government’s role, especially in setting initial infrastructures of ecosystem. Government involvement has always been a debatable issue when it comes to economic development. Without a doubt, Silicon Valley’s story can bring us closer towards understanding the roles each entity should be playing building new economies and market.