0.  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.  It technically does not include the City of San Francisco.

 

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 USA” 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 $300 thousand bank loan by a twenty-two year old kid (Steve Jobs), his older buddy (Steve Wozniak), and a tech 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 guys had a fast growing directory.  The Google guys had an algorithm that would eventually be the heart of a $200bn company (in 2007).  Great things happened over a few decades.  It was magical.

 

The Largest Legal 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 Boom and Bubble, the venture capitalist John Doerr often said: "The Internet is the greatest legal creation of wealth in the history of the planet.”  Internet companies went from $0 to $400 billion from 1995 to 2000, a mere five years (and then crashed to a fraction of that).  Yet Doerr wasn’t far off.   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.    

 

This introduction will examine some of the themes behind Silicon Valley, including:  the big corporations that act as Silicon Valley’s engines; the universities which are feeders of intellectual capital (smart people); the venture capital, angel, and legal infrastructure; the sunny and warm weather; the influx of driven and entrepreneurial immigrants; the culture of starting companies and failing; the difference between wealth and money; and the inspiration of people following dreams to change the world.  Or as the venture capitalist Don Valentine of Sequoia Capital stated in an interview, regarding duplicating the Valley:

 

Basically, almost no other major financial center in the world has ever generated companies of consequence and providence that is so large and visibly successful. And you can blame it on the weather. You can give credit to the great universities. You can explain that the venture community here is stronger and more experienced than other parts of the world. But the mystique of why it works is still very hard to narrow down to six or seven simple declarative sentences. And it - it is a local bit of magic that - works at this particular point and time. The duration of the venture industry is probably only from something like 1960 through the present, so you talk about not even half a century. It - it's still a new and - and sort of closet-like form of financial engineering. We don't think of it as investing at all. We think of it as building companies, often times building industries. And it's an entirely different mentality and attitude than in the traditional idea of buying and selling things. And this is not a place where you buy things; this is a place where you build things. And you participate in the founding team that creates an entirely new company and sometimes a new industry. And now there are far more practitioners.  I mean it's unbelievable the number of companies that have gained prominence, have revenues of a billion dollars in this tiny, little valley. So it is a bit of enigma what all the ingredients are that everybody would like to clone and take away. . . it's a state of mind.

 

[H]ere - you - you start a company and you fail, some of the best people are better after their failure than before their failure. So you don't have the stigma of failure.  Environmentally here - the other ingredient I forgot to mention and it's more true now than it ever was, the - the community is built up of emigrants and immigrants. So almost all of the people who have started or participated in starting these great companies have come from some other state. Noyce was from Iowa. Went to Grinnell College. And there’s a - Gordon Moore might be an exception of somebody who was born in California. So we have a whole history of emigrants coming from all over the country, and in the last ten years more than ever, we have a huge population coming from Southeast Asia.

 

Many of the themes Valentine hinted at are developed below, starting with the corporate engines.

 

The Corporate Engines of Silicon Valley

Outsiders forget that Silicon Valley is not powered by startups, but some big engines, that is, multi-national tech companies with tens of billions of dollars in revenue.  The local paper of record, the San Jose Mercury Daily News, keeps track of the “Silicon Valley 150.”  In 2010, some of the biggest engines in the Valley were:

SV150 Companies with Biggest Profits in 2009

Name

City

Date Founded

2009 Profits ($bn)

Apple

Cupertino

1976

9.36

Hewlett-Packard

Palo Alto

1939

8.02

Google

Mountain View

1998

6.52

Cisco Systems

San Jose

1984

6.07

Oracle

Redwood City

1977

5.66

Intel

Santa Clara

1968

4.37

Gilead Sciences

Foster City

1987

2.64

eBay

San Jose

1995

2.39

Franklin Resources

San Mateo

1947

1.13

Yahoo

Santa Clara

1995

0.598

Source:  San Jose Mercury News, SV 150 Top 10 Lists, April 18, 2010

 

Besides the companies in the table, some other large engines that most outsiders wouldn’t recognize include Symantec, VMWare, Juniper Networks, McAfee, Netapp, Nvidia, Electronic Arts, Sandisk, Synopsys, Varian, Xilink, and of course, Facebook.  Billion dollar companies, all in high tech, dominate the Valley (Franklin Resources is the exception, being a financial services company).  They are the machines undergirding the tech ecosystem. 

 

Some important undercurrents about the Valley are apparent from its engines:

·        The biggest industries are computer software and hardware, then biotech, then business services.

·        The core of these companies is formed by engineers making technical products.  Hence there is always a high demand for highly-skilled engineering labor (and the San Jose Metropolitan Statistical Area has the US’s highest per capita average income, as these engineers are paid well).

·        All of the nine listed in the table above received venture capital funding, as did almost every billion dollar company in Silicon Valley (HP, Salesforce, and Siebel are perhaps the exceptions).  These were young startups in the not-too-distant history (the oldest is HP, incorporated in from 1947, though it dates to a partnership formed in 1939) that grew into becoming massive engines.  The funding infrastructure matters.

·        Most new startups in the Valley are sold to the big engines and are not kept independent and private or taken into an IPO.  So most entrepreneurs are thinking carefully about what the engines want to acquire and process.

 

As the engines consume engineers and startups as their fuel, we turn next to the providers of those.

 

The Feeders of Intellectual Capital

Silicon Valley is built around one of the best nexus of university systems in the world.  Three schools in particular stand out:  Stanford University, the University of California Berkeley, and San Jose State.  Together, they put out such a mass of engineering and scientific talent (both in quality and quantity), that they act as feeders of smart, creative people, or human capital, which is essential to the large engines and startups of the Valley.  This group of talent attracts others from not just the US, but around the world.  Whether it was Arthur Rock who came to the Valley because of the scientific talent around Stanford, Vinod Khosla who came to study at Stanford, or Bill Joy who left Berkeley to form Sun Microsystems, they all came for the engineering/science programs.

 

 

 

 

Stanford is perhaps the most important.  As the venture capitalist Bill Draper once said:  “Silicon Valley is so lucky, starting with Stanford.  I don’t think there’d be a Silicon Valley without Stanford.”  Stanford started out with one of the best radio engineering departments in the country in the 1930s.  What made it special was the professor (and later Dean) Fred Terman, who consciously set out to build a great engineering school and to build strong businesses around the university.  He pioneered academic-industrial relations during a time when most engineering departments (esp. elite ones like MIT) would fire professors or kick out graduate students for having extracurricular interests in industry.  He also attracted millions in federal funding at key times, along with professors and students with an entrepreneurial bent.  Today, Sand Hill Road, which hems one side of the Stanford campus, houses more than two dozen venture capital firms investing billions of dollars.  Many tech startups tend to launch nearby in Palo Alto, Mountain View, or Redwood City.  Google, Yahoo, Youtube, Silicon Graphics, Sun Microsystems, and other major companies started on the Stanford campus, in dorm rooms and offices.  Some consider Stanford to be the epicenter of Silicon Valley (Sunnyvale is the only other contender).

 

UC Berkeley comes next.  It has the greatest number of science and engineering programs that rank in the top 5 programs for the US.  Many consider Berkeley the best public university in the world, with brilliant professors and students across a range of disciplines.  Famous startups from Berkeley include Apple Computer (Steve Wozniak was a Berkeley undergrad when he left to form Apple), Inktomi Corp., and Cadence Design, all multi-billion dollar companies.  Other prominent Berkeley alumni include Gordon Moore and Andy Grove (who started and ran Intel Corp.), Sanjay Mehrotra of San Disk Corp., and Edward Wang of VMware  Corp.  Less well-known is that the venture capitalist Tom Perkins made his first fortune collaborating with Dick Jaenecke and Henry Rhodes at Berkeley to make early laser devices at their startup University Laboratories Inc. (ULI); they sold the company in a few years and each cashed out for millions (Jaenecke was 25 and joked around that the only problem with an early retirement was that all his golf and tennis friends were in their sixties).

 

Stanford and Berkeley are powerful magnets for talent.  Every year the Shanghai Jiao Tong University (of China) puts out its Academic Ranking of World Universities comparing 1,200 higher education institutions worldwide.  Their quantitative formula takes into account alumni winning Nobel Prizes and Fields Medals (10 percent), staff winning Nobel Prizes and Fields Medals (20 percent), highly-cited researchers in 21 broad subject categories (20 percent), articles published in Nature and Science (20 percent), and the Science Citation Index and Social Sciences Citation Index (20 percent).  Stanford and Berkeley rank 2nd and 3rd respectively, in the entire world.

 

Finally, last and often overlooked is San Jose State University (SJSU).  SJSU provides a low-cost, quality education in a range of engineering fields, especially computer science and computer engineering.  Its engineering school has nearly 4,700 students, and it is by far the largest feeder of engineering talent (by number) into Silicon Valley.  Famous alums include Gordon Moore of Intel (who spent 2 years there), Ray Dolby of Dolby Labs, and Omid Kordestani of Google (an early, key employee and vice-president at the search firm). 

 

What did all these school produce?  Rich people and nerds.  Paul Graham wrote an essay called “How to Be Silicon Valley” where he joked that these were all you needed to have an environment conducive to startups.  Beyond that, Graham believes that a personality to a place (an open, tolerant attitude) along with hordes of youth, usually well-educated university students, contributes.  As he puts it:

 

The Bay Area was a magnet for the young and optimistic for decades before it was associated with technology. It was a place people went in search of something new. And so it became synonymous with California nuttiness. There's still a lot of that there.

 

While the three schools provide the raw human brainpower and energy, a broader infrastructure of venture capital firms, angel investors, and law firms also support the incubation of startup companies.

 

The Venture Capital, Angel, and Legal Infrastructure

Two further institutional elements are crucial to Silicon Valley: first and well-acknowledged is the venture capital and angel infrastructure; second and much less known is the legal infrastructure, ranging from law firms to actual laws and regulations unique to California.

 

The venture capital firms and angel networks are deep in the Valley; they are deeper and richer in the Valley than anywhere else in the world.  To give an example, according to Entrpreneur magazine, of all the private venture firms to do 10 or more early stage deals in 2007, 6 out of the 10 have offices in the Valley.  According to the NVCA, 7 of the 10 largest venture investments in 2009 in the Valley, and the Valley took the largest share of total funding, as the table below shows.

 

TOTAL VENTURE CAPITAL INVESTMENTS IN THE US

Investments by Region / Q1 2010

 

 

Regions Defined

Total $ Invested

Average $ Per Deal

Deals

 

All

$4,727M

$6.94M

681

 

 

 

 

 

 

 

 

 Amount 

 %  Total 

 Deals

Silicon Valley  

  $1,528M  

32.33%

202

New England  

  $749M  

15.84%

90

NY Metro  

  $566M  

11.97%

75

LA/Orange County  

  $464M  

9.82%

49

Northwest  

  $238M  

5.03%

33

Midwest  

  $237M  

5.01%

44

San Diego  

  $222M  

4.71%

29

DC/Metroplex  

  $176M  

3.73%

28

Southeast  

  $175M  

3.69%

36

Texas  

 

  $130M  

2.75%

21

Philadelphia Metro  

  $79M  

1.67%

22

Colorado  

  $57M  

1.20%

11

North Central  

  $28M  

0.58%

9

South Central  

  $24M  

0.50%

9

SouthWest  

  $21M  

0.44%

10

 

 

 

 

 

Source:  PWC Money Tree Report, Thomson Reuters, NVCA

 

The Valley accounted for 33% of the nation’s total venture funding in that quarter, equaling the total funding of the next three largest regions.  The Valley’s angels (rich people funding seed and early stage companies) are often the first to source deals, as recent examples of Google, Facebook, and Linkedin show. 

 

More importantly, serial entrepreneurs and venture capitalists operate within unspoken networks of trust.  When trust is broken, the aggrieved party will often choose not to sue the transgressor, but rather make their experience known and hurt the transgressor’s reputation.  For example, when Sabeer Bhatia of Hotmail (sold to Microsoft for $400 million) was displeased with what he believed was predatory behavior by his venture firm, Draper Fisher Jurvetson (DFJ), he let it be known in an interview. It seems Bhatia’s statements were either hasty or false, and DFJ strongly contested his statements while being hurt in the venture community, as entrepreneurs would have to investigate them more deeply.  Reputation matters, as a good reputation lowers transaction and due diligence costs.  One interesting way that entrepreneurs have gotten around the problem of reputation is to rate venture capitalists and term sheets (documents offering money with certain terms) at a website: thefunded.com.

 

Beyond capital, the legal infrastructure in the Valley is impressive.  Today firms like Wilson Sonsini Goodrich & Rosati P.C., Cooley Godward Kronish LLP, DLA Piper LLP, Gunderson Dettmer LLP offer a range of free services like incorporation, term sheet generators, and legal forms for startups.  It’s quite easy for a startup team with a modicum of credibility (whether seasoned entrepreneurs or students from Stanford, Berkeley, or SJSU) to access these free services.  The law firms hope to cheaply acquire customers who will become the next Google or Facebook. 

 

There has also been a strong push for standardized terms for an early/seed stage startup, including these elements identified by the angel Chris Dixon (warning – this is complicated stuff):

·        Investors get either common stock or 1x non-participating preferred stock.  

·        Pro rata rights for investors (no super pro rata rights)

·        Founder vesting with acceleration on change of control. 

·        A board consisting of 1 investor, 1 management and 1 mutually agreed upon independent director.  (Or 2 VCs, 2 management, and 1 independent member). 

·        Founder salaries at a “subsistence” level and no more (no salaries for wealthy founders). 

·        If small angels are investing alongside big VCs, they should get all the same economic rights as the VCs but no control rights. 

·        Option pool – normally 10-20%, coming out of the pre-money valuation.

·        Other terms (registration rights, dividends etc) should be standard NVCA terms.

 

Dixon suggests that entrepreneurs and venture capitalists reduce their negotiations to only two elements: the pre-money valuation of the startup (what it’s worth before outside investments) and the amount invested/raised.  Having a set of standardized terms and simplifying negotiations is very important.  First, it helps entrepreneurs raise money faster using less energy (lower transaction costs).  Second, it promotes healthier relationships between entrepreneurs and venture capitalists, which can help a business grow better.

 

Beyond deal terms and specific law firms, some elements of California state law have been very helpful.  First of all, California does not allow non-compete clauses in employment contracts, so someone can leave a large company or startup and work for a competitor right away.  This facilitates the movement of technology and ideas.  Second, Silicon Valley and California don’t actively enforce the law of trade secrets and proprietary information.  Professional work in Silicon Valley involves employees changing jobs frequently.  The law of trade secrets conceptualizes all information about how to do jobs or narrow technical tasks that are not generally known; this is the property of the employer, who normally can sue departing employees who disclose or might disclose such trade secrets.  California courts, however, do not vigorously enforce trade secrets law and local judges and juries dislike such suits, rarely awarding relief.  Plaintiff companies pay for such suits in diminished internal morale and recruiting ability (who would want to work at a firm suing former employees?).  So while California law "on the books" does not materially differ from other jurisdictions', and while nearly all technical and scientific employees sign standard agreements on trade secrets, invention assignment, and proprietary information, such agreements are not effectively judicially enforceable.

 

Finally, some general cultural and legal features facilitate the formation of startups, including: rapid job mobility; short job tenures; heavy use of temporary labor, independent contracting and other contingent labor; weak internal labor markets; weak loyalty to individual firms; career paths that often involve starting a business or joining a startup; hiring for specific skills; labor market intermediaries that facilitate short-term hiring, such as temporary help agencies and Internet job boards; flexible compensation involving bonuses and stock options; and strong inequality in earnings and labor market participation.  As incentives go, the stock option culture is key, as it incentivizes employee-owners to toil for long hours and so potentially get a long payout (hence condensing 10 years of “normal” work into an intense 3 year period).

 

While members of young startups don’t have much free time due to their long hours, they certainly appreciate what free time they have, and good weather on those rare moments of leisure is an attractive part of their life.

 

Sunny and Warm Weather

One oft-cited but underappreciated fact of Silicon Valley’s development is its sunny, Mediterranean weather.  Many entrepreneurs were attracted by the weather, including William Shockley, whose company, Fairchild Semiconductors, is considered to be a seminal tech startup; offshoot companies from Fairchild gave birth to the semiconductor and later the entire computer and software industries in the Valley.  Shockley was a Palo Alto native and one big reason he came back was the pleasant weather.  As any California native will attest, year-round sunny weather is hard to resist.

 

A Mediterranean climate has a mild, rainy winter and a hot dry summer, which is perfect for grape cultivation (and hence winemaking).  Only about 2% of the earth’s land surface has a Mediterranean climate.  All these regions are costal:

 

A more striking description compares the seasonal weather patterns of Palo Alto (the heart of Silicon Valley) and Cambridge (the heart of the Boston/Route 128 region).  Note that Palo Alto is warmer in the winter with averages in the low 50s compared to the low 30s in Cambridge, and Palo Alto is generally cooler in the summer, with average temperatures in the high 70s compared to the low 80s in Cambridge.  Programmers and engineers who come to the Valley notice this – they are data-driven, after all.

 

Palo Alto, CA

 

 

 

 

 

Month

Avg.

Avg.

Mean

Avg.

Record

Record

 

High

Low

 

Precip

High

Low

Jan

58°F

40°F

49°F

3.24 in.

75°F (1976)

21°F (1963)

Feb

62°F

43°F

52°F

3.18 in.

84°F (1981)

24°F (1962)

Mar

64°F

46°F

55°F

2.65 in.

85°F (2005)

22°F (2004)

Apr

69°F

47°F

58°F

0.89 in.

94°F (2004)

31°F (2001)

May

73°F

51°F

62°F

0.35 in.

100°F (1997)

33°F (1977)

Jun

77°F

55°F

66°F

0.11 in.

107°F (1961)

40°F (1982)

Jul

79°F

57°F

68°F

0.03 in.

105°F (1988)

41°F (1983)

Aug

79°F

57°F

68°F

0.08 in.

101°F (1968)

44°F (1982)

Sep

78°F

55°F

66°F

0.19 in.

105°F (1971)

41°F (1981)

Oct

73°F

50°F

62°F

0.85 in.

100°F (1980)

34°F (1971)

Nov

64°F

44°F

54°F

1.83 in.

89°F (1955)

15°F (2003)

Dec

58°F

39°F

49°F

2.31 in.

75°F (1967)

20°F (1990)

 

 

 

 

 

 

 

Cambridge, MA

 

 

 

 

 

Month

Avg.

Avg.

Mean

Avg.

Record

Record

 

High

Low

 

Precip

High

Low

Jan

36°F

22°F

29°F

3.92 in.

72°F (1950)

-30°F (1946)

Feb

39°F

24°F

32°F

3.30 in.

70°F (1985)

-18°F (1934)

Mar

46°F

31°F

39°F

3.85 in.

89°F (1998)

-8°F (1872)

Apr

56°F

41°F

48°F

3.60 in.

94°F (1976)

11°F (1874)

May

67°F

50°F

59°F

3.24 in.

97°F (1880)

31°F (1882)

Jun

77°F

59°F

68°F

3.22 in.

100°F (1952)

41°F (1945)

Jul

82°F

65°F

74°F

3.06 in.

104°F (1911)

50°F (1988)

Aug

80°F

64°F

72°F

3.37 in.

102°F (1975)

46°F (1940)

Sep

73°F

57°F

65°F

3.47 in.

102°F (1881)

34°F (1914)

Oct

62°F

46°F

54°F

3.79 in.

90°F (1963)

25°F (1936)

Nov

52°F

38°F

45°F

3.98 in.

83°F (1950)

-2°F (1875)

Dec

42°F

28°F

35°F

3.73 in.

76°F (1998)

-17°F (1933)

 

 

 

 

 

 

 

Source:  Weather.com (2010)

 

 

 

 

The Valley’s weather is so nice, it tends to attract one essential group:  immigrants with science and engineering backgrounds from countries such as India, China, Russia, and Eastern Europe, all of whom don’t want to put up with a Bostonian winter.  Both authors of this book at one point lived in Redwood City, California, near Woodside and Palo Alto, whose temperate, sunny weather led to an official motto of “Climate best by government test.”

 

The Immigrant Influx

Silicon Valley is a talent magnet.  It doesn’t just attract talent from a Californian pool of 37 million people or an American pool of 310 million people.  It attracts talent from a global pool of 6,800 million people (especially the 2 billion plus pool of China and India).  Most importantly, the Valley gets talent from the science, technology, engineering, and mathematics (STEM) fields.  While immigrants make up only 12% of the US population, they constitute over 24% of the US science and technology workforce and over 47% of US science and technology PhDs in 2009.  This has powerful implications.

 

For example, one study in 1999 by Anna Lee Saxenian of the Public Policy Institute of California and the University of California, Berkeley, showed that foreign-born workers account for about a third of the skilled scientific and engineering workforce in Silicon Valley.  Indians and Chinese dominated, with nearly 75% of the total. Saxenian found that in 1998, Chinese and Indian immigrants were running a quarter of the high-tech businesses in Silicon Valley, collectively accounting for more than $16.8 billion in sales and over 58,000 jobs.  More specifically, Chinese and Indian CEOs were running 13% of Silicon Valley technology companies started between 1980 and 1984 and 29% of those started between 1995 and 1998.  In a 2008 extension to her study, Saxenian and Vivek Wadhwa, along with Ben Rissing and Gary Gereffi, estimated that of all companies founded from 1995 to 2005 in the Valley, 25% had at least on immigrant co-founder, and the companies produced $52 billion in sales and employed 450,000 workers in 2005 (but only a third of the founders were from India and China).  Interestingly, for US-born founders in the Valley, most came disproportionately from five other US states besides California:  New Jersey, Michigan, Georgia, Virginia, and Massachusetts.

 

Allowing more skilled immigrants has direct impact on innovation.  According to one study, a 10% increase in the number of foreign graduate students would raise patent applications by 4.5%, university-patent grants by 6.8%, and non-university patent grants by 5.0%.  Note that it was government intervention that allowed immigration, specifically the Hart-Celler Act of 1965, and the Immigration and Nationality Act of 1990, both of which created and expanded special visas for highly skilled immigrants and their families (the latter nearly tripled the number of skilled visas from 54,000 annually to 140,000 annually).

 

Chinese and Indian immigrants were also prolific networkers, starting more than two dozen business and trade associations.  As Satish Gupta, an Indian immigrant, founder of SenSen Networks, and an early member of TiE (The Indus Entrepreneurs), a Valley networking group, stated:

 

When some of us started our businesses we had nobody we could turn to for help. We literally had to scrounge and do it on our own. What we see in Silicon Valley, especially with the new start-up businesses, is that contacts are everything. All of us have struggled through developing contacts, so our business is to give the new person a little bit of a better start than we had. . . networks work primarily with trust elements of trust are not something that people develop in any kind of formal manner .trust has to do with the believability of the person, body language, mannerisms, behavior, cultural background, all these things become important for building trust caste may play a role, financial status may play a role.

 

The ethnic networks are important.  As Vinod Khosla, a cofounder of Sun Microsystems and a major venture capital investor summarizes: "the ethnic networks clearly play a role here: people talk to each other, they test their ideas, they suggest other people they know, who are likely to be of the same ethnicity. There is more trust because the language and cultural approach are so similar."  Also, once a successful Indian entrepreneur invests in a company, he provides the legitimacy that allows the entrepreneur to get a hearing from the region's more established venture capital funds.

 

As a final note, both authors of this book are immigrants from two different countries and continents:  Italy and India.

 

The Culture of Starting and Failing

Silicon Valley works because it encourages smart failure.  One oft-repeated piece of advice is “Fail often but fail quickly.”  As the co-founders of the MIT Entrepreneurship Review discovered after visiting the Valley:

It appears as though trial-and-error is an evolutionary process in the West where failures are seen as creating opportunities for better innovations to take root. Failure is encouraged and rarely punished. The spirit of the American West! And it's not that this message isn't well known, most of us have heard it multiple times before. It's that hearing this message live being continuously stressed by some very successful people brought it to life that much more.

 

But failing isn’t the entire rub.  As Doug Leone, a Sequoia Capital partner stated: “Successes and failures should be balanced. If you haven't failed, you haven't tried; but if you've only failed, you don't know how to do things right.”

 

A more perceptive view regarding failure comes from Bill Coleman, a serial entrepreneur and co-founder of BEA Systems (sold to Oracle for $8.5 billion in 2009):

 

I met with a delegation of Russian VCs on a trip to Silicon Valley hoping to build centers of innovation in Russia. I told them I would tell them Silicon Valley's secret. They all leaned closer to hear it. I said it was failure, tolerance of massive amounts of failure. One in 20 companies make it here, but if you fail you try again. In other cultures if you fail you often don't get the chance to try again. . . . I've had failures, Visicorp was a failure and so was Dest Systems. At BEA Systems, when I was putting together my senior staff I wanted people that were in at least one company that had failed. You learn not just about failure and how to make things work, you learn the psychology of failure and how you react to it. If it's the first time you are learning it you probably aren't keeping the momentum going in your company. You are exactly right.

 

When I got out of the air force, and went to VisiCorp and we failed. And then at Dest Systems, great technology but we couldn't get any money. I was looking at all these people, at the time there were lots of PC companies, and I started to notice that guys that failed started showing up at other companies in more senior positions. Aha, I realized, it doesn't matter if you have some failures what matters is that you dust yourself off and learn from that failure. I used to say Sun did everything wrong that was possible, but it never did anything wrong for too long. A startup is not a technology company - it is a learning machine.

 

There are few business cultures in the world that are as tolerant of failure as the Valley.  People who fail and learn from it become better entrepreneurs and managers.  They become intelligent risk-takers, knowing how to work the odds and create wealth.  Or as one successful entrepreneur told me at the 2010 TiE Conference: “A startup is just a machine to turn one-dollar bills into twenty dollar bills – that’s it.”  This book will have three chapters on failures, as the failed ventures in the Valley have much to show about what makes the Valley and its people successful.

 

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 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 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:

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

 

The Inspiration to Follow Dreams to Change the World

Creating wealth is a powerful motivator.  If enough people focus on it, it’s conceivable that poverty could be a historical oddity.  Yet most entrepreneurs and venture capitalists in the Valley point to something greater than wealth (or money).  The most motivated ones have a vision for what they want the world to be.  They already have more money than they need and have created more wealth than they can give away in their lifetimes.  They work because they have a dream to change the world.

 

Some visions include:

 

Ultimately, Silicon Valley is built of both dreams and institutions.  Dreams are idiosyncratic; they start in an individual’s mind and spread like fire as an entrepreneur motivates a team to build a company.  Institutions provide all the necessary resources: the talented people, the productive work environment, the supportive infrastructure, the right cultural mindset, and so on.  As many residents of the Valley have said: “Silicon Valley is a state of mind.”  Yet it is also a place where the right institutions have been built, where every newcomer can, to paraphrase Isaac Newton, stand on the shoulders of giants.

 

This is a book about the people who built Silicon Valley, their dreams, and the institutions they left us that still stand today.  The author’s hope is that the Silicon Valley mentality and its institutions can spread across the world, spreading wealth and sparking dreams.

 

 

 

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