Excerpts from the book

A History of Silicon Valley

Table of Contents | Silicon Valley History pages | Purchase | Correspondence
(Copyright © 2010 Piero Scaruffi)

1. Introduction

This book is a history of the high-tech industry in the San Francisco Bay Area.

This book has two sub-titles: “The Largest Legal Creation of Wealth in the History of the Planet” is Arun Rao’s subtitle; “A Moral Tale” is Piero Scaruffi’s subtitle.

 

Piero Scaruffi’s Introduction

I have read many books on Silicon Valley. The best ones are listed in the bibliography. Most of them are (explicitly or implicitly) collections of essays. Those are easy to write. We’re all good at analyzing the world. I could not find a book that is a detailed chronological history of Silicon Valley, which is, of course, much more difficult to write. I also felt that I disagreed with most of the conclusions of those books: those “essays” only partially represented Silicon Valley, and were based on a small sample of biographies and case studies. I felt that they pretty much missed the point, propagating a handful of very popular myths while missing too much of the real story. I cannot help thinking that there is a correlation between the two facts: because those authors did not study the detailed chronology of Silicon Valley, they formed a very partial vision of it. So I set out to write a detailed chronicle, densely packed with facts. I know that a detailed chronicle is not an easy book to read compared with an eloquent analysis, but that in my opinion is the book that was missing. In a sense, I wanted to see the data before drawing the conclusions. After all, my background is in the empirical sciences.

Needless to say, this also means that my history is not fictionalized and not sensationalistic. I stick to the facts. If you want to read Hollywood-style anecdotes, you are reading the wrong book.

As you read through this preface, you will find my bias to my history of Silicon Valley. It matured as I was writing. The more details I added to my chronicle, the more apparent some threads became. They may sound quite controversial to those who only heard the myths (and, obviously, to those who fabricated those myths). I just beg the reader to believe that the bias came after analyzing the data, not before.

It is difficult to write a history of Silicon Valley without mentioning what else was going on in computers around the world. Therefore this book is also a history of computing in disguise. The same happened, to a minor extent, for biotechnology.

The meta-theme of the book (that would require a much bigger book to fully explore) is how one industry led to the next one in an apparently endless cascade of continuous reinvention: gold led to railways that led to shipping operations that led to ports that had two side effects: ports created coastal cities that needed electrical power that required high-voltage power transmission that established the region as a leader in electrical engineering; and ports needed radio communications that needed electronics that created the semiconductor industry that led to the microprocessor that led to the personal computer that created the software industry that benefited from the Internet that created huge fortunes that were invested in biotech and greentech. That’s, in a nutshell, the history of the Bay Area during the 20th century. The question is how.

Silicon Valley does not exist in a vacuum. Its history cannot be divorced from the history of the Bay Area’s economy and society at large. Even more importantly, its ascent cannot be decoupled from the artistic and cultural renaissance of the region. All the great centers of technological progress boasted artistic creativity at the same time: Athens, Italy during the Renaissance, Paris and Berlin at the turn of the century. Silicon Valley was part of a region in which creativity was treasured, along with a provocative, subversive and irreverent attitude. Alternative lifestyles and a utopian counterculture seem to have always been in the genes of the Bay Area, starting with the early poets and visual artists and then continuing with the hippie generation. Scholarly books tend to discuss too many abstract models and ignore the most important of all factors: creativity. Silicon Valley has consistently boasted a very high degree of creativity. One could argue that everything else is a detail.

Somewhat related is a mindset of independence and individualism that predates Silicon Valley and that led to the “do it yourself” philosophy of the hobbyists who started Silicon Valley. Traditionally, the emphasis on Silicon Valley’s development has been on technology transfer from universities, in particular commercialization via startup company creation. While that certainly played an important role, the hobbyist (whether a university alumnus or not) played an equally important role. The hobbyists represent the passion to toy and tinker with novel technology. It was part of the US psyche, but in the Far West it had the additional advantage of being far enough from all the industrial colossi.

That attitude might explain Silicon Valley better than any economic theory. We tend to take for granted that Silicon Valley is an economy of high-tech companies and we think it is natural that they were started by engineers, not businessmen. But maybe we should instead look at Silicon Valley businesses from the opposite direction: because this was a place where engineers rather than businessmen started companies, then it was inevitable that their companies would be high-tech companies.

There now seems to be agreement among scholars that Silicon Valley started in the early years of the 20th century, meaning that behaviors normally associated with Silicon Valley were pioneered back then. I feel that one should go even further back. As one analyzes how the various waves of business got started, one realizes that the one thing they have in common is a spirit of the Wild West. The Wild West’s eccentric and independent character is the predecessor to all the inventors and gurus of Silicon Valley.

The prominent attitude towards risk-taking may also derive from the pioneers of the Wild West.

Each and every mass-consumed product has changed society, from Coca Cola to McDonald’s, from blue jeans to the movies. However, Silicon Valley has specialized in products that cause much bigger social change of a more endemic kind. There are, in fact, places in the world where much more sophisticated technology is created, from nuclear power plants to airplanes. But personal computers, web services and smart phones (and, in the near future, biotechnology and greentech) have changed our lives in a more invasive and pervasive manner. Somehow these are the technologies in which Silicon Valley excels. It is not about the complexity and sophistication of the technology, but about the impact it will have on human society. In a sense, Silicon Valley “loves” socially destabilizing technologies. Could it be that this happens because Silicon Valley arose from what used to be a very unstable quasi-anarchic society?

Much has been written about the “knowledge economy” of Silicon Valley, but I feel that mostly it has been written by people who worked at very high levels (or did not work at all in Silicon Valley companies). The knowledge that the average engineer has is usually limited to her/his field. In fact, it is hyper-specialistic. The anecdotal histories of Silicon Valley are full of self-made multimillionaires but they rarely talk about the thousands of engineers who retired early because their hyper-specialistic skills became useless and it was just too difficult for them to retrain. Those hyper-specialists actually had very limited knowledge (that was often worthless outside their cubicle). By definition, labs that are full of hyper-specialists are designed to produce incremental improvements on existing technology, not groundbreaking innovation. Most of the innovation came from something else.

At the same time, though, the great innovators of Silicon Valley (Fairchild, HP Labs, Intel, Xerox PARC, Apple, Google) built companies not so much around a technology as around their human resources. They hired the best and nurtured highly creative environments. The way companies cared for creating superior “firepower” inside their labs (rather than for a “return on investment”) may have more to do with innovation than any other myth of Silicon Valley. And, again, a big chunk of innovation came from the independent eccentric hobbyist (whether inside or outside the academia), who did have a lot of “knowledge” about the technology and the industry, but not because of the famed networks of venture capitalists and entrepreneurs. Hobbyists invest all their spare time into their hobby, absorbing knowledge from magazines, blogs and party chats.

Many have written about the importance of venture capitalists in the development of Silicon Valley. However, we need to give credit to the biggest venture capitalist of all: the government. The history of high-tech in the Bay Area constitutes a prime example of the benefits of technologies that move from military to civilian use, and of government intervention in general. The initial impulse to radio engineering and electronics came from the two world wars, and was largely funded by the armed forces. It was governments (US and Britain) that funded the development of the computer, and NASA (a government agency) was the main customer of the first integrated circuits. The ARPA (another government agency) created the Internet. The World-Wide Web was created at CERN, a center funded by multiple European governments (the worst possible nightmare for those who hate government bureaucracies).

Much has been made of the way Silicon Valley attracts and spawns businesses, trying to explain it in terms of academic and financial factors. However, this model would not work in Siberia or the Congo, and not even in most of Western Europe and Japan. In fact, there were very few places where it could have worked, and there are still very few places where it can work in 2010. The Bay Area managed to attract brains from all over the world thanks to its image as a sunny, “cool,” advanced and cosmopolitan region, a dreamland for the highly educated youth of the East Coast, Europe and Asia. Because the Bay Area was underpopulated, those national and international immigrants came to represent not an isolated minority but almost a majority, a fact that encouraged them to behave like first-class citizens and not just as hired mercenaries. And I believe that the wave of college-level immigration got started in the 1960s, before the boom of Silicon Valley, and for reasons that are more related to the “summer of love” or to surfing than to microprocessors.

That said, we must admit that Silicon Valley invented very little. Computers were not invented in Silicon Valley, and Silicon Valley never had the largest hardware company, nor the largest software company, in the world. Silicon Valley did not invent the transistor, the integrated circuit, the personal computer, the Internet, the World-Wide Web, the browser, the search engine, social networking, or the smart phone. Neither biotech nor greentech are from Silicon Valley. Silicon Valley was instrumental in making them go “viral.” Silicon Valley has a unique (almost evil) knack for understanding the socially destabilizing potential of an invention and then making lots of money out of it; Schumpeter’s “creative destruction” turned into destructive creativity. That’s, ultimately, what people mean when they talk about Silicon Valley as a factory of innovation.

The eccentric independent is truly the protagonist of this story. People, especially Europeans, wonder why Silicon Valley happened where it happened. One simple answer is that the US in general is friendlier than Europe towards the eccentric independent, and California in particular is the friendliest. The suit and tie is my favorite metaphor. In Europe you can’t possibly be a successful employee if you don’t wear a suit and tie. Therefore the employees who rise in the hierarchy tend to be the ones who are better at dressing up, and not necessarily the ones who are more knowledgeable, competent and creative. In California even billionaires wear blue jeans and t-shirts.

Another reason why it could not happen in Europe is the risk-averse mindset that I can summarize in an autobiographical anecdote. I worked for a decade at a European multinational. Every time one of us had an idea for a new product line, the management would ask us a trick question: “Has anybody else done it yet?” If we answered “yes,” the management would conclude: “Then we are too late.” If we answered “no,” the management would conclude: “Then there is no need for it.” A case in which we could work on something new just did not exist. Silicon Valley, instead, amplified the passion of the US for risk-taking. Silicon Valley has cultivated a philosophy of risk-taking and turned it into a science.

Another key difference between Silicon Valley and most of the world, particularly Europe, is the mindset of faculty at universities. European universities are static, feudal bureaucracies in which a professor is the equivalent of a baron (granting favors to assistants) and is, in turn, the vassal of a department head. For life. On the contrary, Bay Area universities and colleges encourage their faculty to start their own companies.

One can finally wonder why it happened on the West Coast and not on the East Coast, which was more educated, wealthy and cosmopolitan. I think the answer is the same one as the answer to the question why the hippies were born in San Francisco, or why the Free Speech Movement was born in Berkeley: a unique strand of anti-establishment sentiment and a firm belief in changing the world.

I also felt that too little is written about the “failures” of Silicon Valley, i.e. the many industries that here had a strong base, including massive research programs at the local universities, but never made it big: artificial intelligence, laser, virtual reality, etc.

There were a number of financial stimuli to the development of Silicon Valley. Once fortunes were created, though, Silicon Valley benefited from the generosity of its own millionaires. Philanthropy and “angel” investing provided a secondary boost to the creation of creativity (excuse the pun). “Be creative when you are not yet rich, and support creativity when you get rich:” that could be the motto of Silicon Valley’s entrepreneurs. The lifestyle of the Bay Area creates social pressure to “be different” and social pressure to “be good.” Rich, self-made people who meet at a party don’t just boast of how they made their money: they also boast of how they are spending it to help worthy causes or to help fledging startups. In a sense, here self-made multimillionaires feel a sense of gratitude towards the system that allowed them to become self-made multimillionaires. It’s a phenomenon that has been part of the fabric of US society, and here may find its most sublime expression.

Therefore the theme of all themes is that Silicon Valley was a sociological and economic experiment before it was a technological and entrepreneurial experiment. Silicon Valley fostered a marriage of advanced technology and unbridled capitalism via a triangular relationship with utopian collectivism: Silicon Valley wed utopian collectivism and advanced technology (the sociological experiment), and, at the same time, Silicon Valley wed utopian collectivism and unbridled capitalism (the economic experiment). Silicon Valley was an alternate universe.

 

Piero Scaruffi, Silicon Valley, January 2011

 

 

Arun Rao’s Introduction

 

Silicon Valley: The Name and the Legend

Silicon Valley.  Or just the “Valley.”  Officially, its name is the Santa Clara Valley. It stretches between the Santa Cruz Mountains and the San Francisco Bay, from Redwood City through Palo Alto, Mountain View, Sunnyvale, and Santa Clara, down to San Jose. Then it continues on south toward the farming community of Gilroy.  The real technological locus is between San Jose to Redwood City or San Carlos, with a far edge of San Mateo.  The Valley historically did not include the city of San Francisco.  Yet with many startups and venture capital firms based there, by 2010 the city of San Francisco and parts of the East Bay (Berkeley and Emeryville) belong to the Valley too (a metaphysical space). 

 

A Map of Silicon Valley in 2010

 

The journalist Don Hoefler is credited with coining the phrase: “Silicon Valley,” though Bostonians visiting in the 1960s had previously used that term.  With its first publication in January 11th, 1971, Hoefler wrote a series of articles titled “Silicon Valley US” for a weekly tabloid called “Electronic News,” in which he described groups of electronics firms, especially semiconductor companies, thriving and multiplying in Santa Clara county.  Some sources suggest Ralph Vaerst, then President of Ion Equipment, suggested the name “Silicon Valley” to Hoefler, who had worked as a publicist in one of the most important early firms in the Valley, Fairchild Semiconductor Corp. in Mountain View.

The legend came with the great companies built there with small amounts of initial capital.  Companies that changed the world.  A portly man named Arthur Rock helped raise money to fund a team of rebels, Gordon Moore and Robert Noyce, with $10 million to create Intel Corp., the first massive semiconductor company and still the industry innovator in 2010.  Apple Corp., the world’s greatest consumer electronics company of 1980-2010, was initially funded with a small bank loan by a twenty-two year old kid (Steve Jobs), his older buddy (Steve Wozniak), and a technology executive who guaranteed the loan (Mike Markkula).  Genentech, the first company to synthesize human insulin for diabetics, started with $250 thousand and gave its early investors a 3500% return.   Yahoo and Google, which made the web understandable and searchable, each began with two Stanford grad students. The Yahoo founders had a fast growing directory.  The Google founders had an algorithm that would eventually be the heart of a $200 billion company (in 2007).  Great things happened over a few decades.  It was magical.

 

The Largest Creation of Wealth in the History of the Planet

In numerous investor presentations in the 1990s, during what in hindsight we know was the Tech Bubble, the venture capitalist John Doerr often said: “The Internet is the greatest legal creation of wealth in the history of the planet.”  Presumably Doerr didn’t count “illegal” periods of “wealth creation” like when the Romans sacked Carthage or when Britain sucked resources out of its 18th century colonies.  Yet Doerr wasn’t far off. Internet companies went from zero to $400 billion from 1995 to 2000, a mere five years (and then crashed to a fraction of that).  From 1975 to 2000, more billion dollar companies were created in Silicon Valley than in any other part of the world (perhaps in the history of the planet, but measurement difficulties make it hard to compare to previous decades or centuries).   

Doerr apologized after the bust in 2001 that his oft-repeated quote helped fuel the dot-com bubble that focused investors more on a “mercenary” drive to make quick (and illusory) stock market profits off Internet start-ups rather than on incubating businesses with revolutionary technology.  He then cheekily described the Internet as “the largest legal creation (and evaporation) of wealth in the history of the planet.”  Yet even disregarding the stock bubble, Doerr’s firm, Kleiner Perkins, had invested $1.3 billion in 250 technology ventures by 2000, of which successful firms created 192,000 jobs, achieved $73 billion in sales.  After the bust, the great Internet firms of Cisco, Google, and Oracle (whose databases power the Internet) would survive and thrive, while joined by upstarts such as Facebook and Salesforce.com.   

 

The Difference between Wealth and Money

One thing that people in Silicon Valley seem to intuitively understand is something that’s very different than the mentality of Wall Street, large corporations, or politicians.

Simply put: wealth is *not* money. 

Money is a paper marker used for transactions; it is a useful social device which acts a measure of value, a bartering tool to aid transactions (a medium of exchange), and sometimes a holder of value (note that gold holds its value better than any paper currency).  Money is zero-sum, unless a central bank prints more or banks generate more through the lending process.  Money is a marker.  It is a way of moving wealth.

Wealth consists of goods and services that improve people’s lives.  It includes tangible goods (food, clothes, houses, cars, appliances, gadgets) and intangible activities (vacations, airplane services, haircuts, manicures, health and education services, etc.).

As Paul Graham, an entrepreneur and angel investor, states in his excellent essay, “How to Make Wealth (May 2004),” what most businesses really do is make wealth. They do something people want.  Profit is only a measurement tool and one shouldn’t confuse the marker with the core activity.  Graham continues on to discuss:

§         The fixed-pie fallacy that many people believe, in contrast to the Valley view that the rich can get richer along with everyone else getting richer – it pays to cooperate and make a bigger pie;

§         What a job is – a very slow way of creating wealth;

§         The importance of craftsman culture, which is evident when someone can create wealth with their own mind and hands;

§         What sort of incentive structure makes a startup culture possible – mostly measurement of individual contributions (which a small company can do) and leverage of a team’s abilities (which is most valuable in a technology startup, where a small innovation can scale easily to make millions of people’s lives better and easier).

Graham’s essay is worth reading many times over, and it should be taught in every business school, entrepreneurship program, and government policy course.

This is a book about the people who built Silicon Valley, their dreams, and the institutions they left us that still stand today.  We have tried to write an analytical history by describing key people, events, and trends, and trying to weigh their relative importance and impact economically and socially.  The authors’ hope is that by describing Silicon Valley’s mentality and its institutions, we can help disseminate its magical elements across the world, spreading wealth and sparking dreams.

 

Arun Rao, San Francisco, February 2011


 

Piero Scaruffi’s Biography

Piero Scaruffi received a degree in mathematics (summa cum laude) in 1982 from University of Turin, Italy, where he did work in the general theory of relativity. In 1983 he relocated to Silicon Valley to work at Olivetti’s Advanced Technology Center, where he was employed first to port the Unix e-mail program to Olivetti’s version of Unix and then to implement the first object-oriented system (Smalltalk) for a Wintel personal computer.  In 1985 he started and managed Olivetti’s Artificial Intelligence Center, leading a number of joint projects with universities in the US and Europe.  After a visiting scholarship at Stanford University to conduct research on cognitive science, in 1999 he joined Intellicorp. There he continued to work on artificial intelligence-based business solutions.

Since 2003 he has been a free-lance consultant for Silicon Valley and European companies. He has lectured in three continents on “Theories of Mind” and “History of Knowledge,” most recently at UC Berkeley. He has published a number of books on artificial intelligence and cognitive science, the latest one being “The Nature of Consciousness” (2006). Meanwhile, he pioneered internet-based journalism with thousands of articles on music, science, cinema, literature, and history.  In 1985 he started his first e-zine, distributed by e-mail over the Internet.  Between 1986 and 1990 he created an online database, downloadable via FTP.  That database mutated into his own website Scaruffi.com in 1995.  In 2006 the New York Times ran an interview with him titled “The Greatest Website of All Time.” 

All along, Piero has continued writing poetry both in Italian (for which he was awarded several prizes in the 1980s) and in English.  His book “Synthesis” (2009) collected poems and meditations.  In parallel, Piero has become a controversial music critic.  His latest books on music are: “A History of Jazz Music” (2007), and “A History of Rock and Dance Music” (2009). He has organized several interdisciplinary cultural events in the Bay Area, notably the monthly “Leonardo Art Science Evenings” (LASERs).  He has also been on the board of the art magazine “Leonardo” (MIT Press).  An avid traveler who spends months on the road, he has visited more than 130 countries in the world as of 2010.

 

Arun Rao’s Biography

Arun Rao is an investor and entrepreneur in the San Francisco/Bay Area.  He has previously contributed articles to the Economist and Seeking Alpha on business issues and the financial markets.  Arun has worked at two investment firms in Silicon Valley, one in Menlo Park (on Sand Hill Road) and the other in San Francisco.  He is an attorney and a graduate of the Wharton School of Business at the University of Pennsylvania.

 

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Table of Contents | Silicon Valley History pages | Purchase | Correspondence
(Copyright © 2010 Piero Scaruffi)