How did Silicon Valley Become the Centre of Innovation?
The factors that made Silicon Valley
One of the greatest tragedies of human history is World War II.
The death toll worldwide is estimated to be around 90 million, if not more. Millions more served as casualties and had their lives completely ruined.
During the war, we discovered how far human violence can go. But we discovered more than that. We discovered how far human intellect can go as well.
While soldiers were on the front lines putting their bodies through the horrors of war, scientists in their countries were putting their brains to the test to give their side an edge.
One such scientist at Stanford University was Fred Terman–he was researching radio-technology to tackle the German communication system: Enigma
Although Terman’s research was for military purposes, two of his students — William and David decided to use this technology and do something different. They decided to build an audio-oscillator in their garage.
For those of us born in the 21st century, an audio-oscillator is basically a device that creates sound from electricity.
This seems irrelevant to us because we have better ways of producing sound today, but at that time, it caught the attention of a new movie-producer. You might know him, his name is Walt Disney.
This product changed the way Disney movies were made. Disney bought these by the case. This ultimately led William and David to start their own company.
You might have heard of their little company, which they named after their last names: Hewlett and Packard (or HP for short).
Without the war, Terman’s research would not have happened and his students William Hewlett and David Packard might have just ended up being scientists like Terman.
Terman decided that if 2 of his students can create something groundbreaking, then why can’t others.
With this in mind, he started an unprecedented “research lab” that helped Stanford students develop an idea and turn it into a revolutionary company.
Sound familiar? That is what we have taken to be the definition of a startup incubator.
He founded the first-ever startup incubator called The Stanford Research Institute(SRI). SRI went on to produce other multi-million dollar companies such as Kodak, General Electric, and Lockheed Corp (just to name a few).
In just the duration of WW2, Terman’s research led to the formation of HP, which triggered a snowball effect of him creating the first-ever startup incubator.
It sounds like quite the foundation for innovation. But that wasn’t all. The war continued to develop Silicon Valley even after it was over.
Going back to Enigma–it made the Allies aware of how technologically handicapped they were. If it weren’t for Alan Turing’s computer, the allies could potentially have lost the war, and this article would probably be written in German.
But after the war, the US decided that they need a better way of communicating information throughout their military. To find a better solution, they turned to Stanford yet again.
Keep in mind that researchers at Stanford University(Robert Oppenheimer and Felix Bloch) spearheaded The Manhattan Project(The nuclear bomb), so in terms of scientific contribution to the military, Stanford became the favourite child.
It only made sense to go back to Stanford to solve the issue.
In collaboration with UCLA, UC Santa Barbara, and the University of Utah, the military decided to start an internal communications network called ARPANET(Advanced Research Projects Agency Network). After years of work, at 10:30 pm PST on 29 October 1969, Stanford sent out the first login request to a Host at UCLA and set up the first-ever network where multiple hosts can simultaneously exchange information.
We’ve come a long way since 1969, today ARPANET is commonly known as the Internet.
In perspective, this piece of land in the bay area of California had gotten million-dollar companies, multiple scientific facilities(part of the government or military), and first access to the Internet–all because of the most tragic human-caused event in recorded history.
It can’t be just military-sanctioned innovation, because if that were the case, other regions like Berlin and London would be on the same footing. Therefore there is a lot more that made Silicon Valley the centre of innovation.
Money is an interesting social construct — have you ever heard of the cliche phrase,
Money makes the world go round
Well, I propose, that it also takes money to get around. Revolutionary, I know.
This statement is particularly true in explaining the formation and boom of Silicon Valley. Taking it back to the war(last time I bring it up, I promise) many soldiers came back home and didn’t have a family anymore, or there were families that lost members who were fighting on the front lines. In a male-dominated society, when the main earner isn’t there, it becomes harder to maintain a household at a time where prices of literally everything is going up.
Many families had to move because of this, and with the money a family got for the death of the earner, there were little-to-no solutions for families. However, the little solution that most families had was moving to San Francisco.
Statistically, house prices in the bay area were 10–30% lower than the average price across the country from 1950–2000.
People now had disposable incomes that they could put towards many different things; many households decided it would be a good investment to renovate the garage of their houses.
Cheap land wasn’t only attractive to families that had to move, but also companies. Running a company is very expensive, and a big portion of their costs go towards renting out some sort of space for manufacturing(I’m talking about a time where companies would manufacture domestically and not outsource to the child labours in Asia).
Having access to ports, getting material was cheap and the land was relatively inexpensive. Companies such as IBM and Sylvania jumped at this and immediately set up shop in the bay area.
At the same time, yet another scientist in Silicon Valley was coming up with groundbreaking innovation, this time with transistors in an integrated circuit.
Gordon Moore came up with this radical idea that the number of transistors in an integrated circuit would double every two years. Today we just know it as Moore’s Law but at the time this was unprecedented and one company was at the forefront of proving this: Intel(Another company that started in a garage).
In a valley where new innovation was happening every Thursday, living and land were cheap and had as much hardware as a radical inventor could want. It sounds like the true making of an epicentre, but it was one last factor that sealed it and made Silicon Valley.
One of the hardest things to do when a company needs more money is to ask for it. Asking for money is daunting — I can’t ask my mother for $20 without a certain level of fear, but a company needs a lot more than that.
Most companies in the valley were asking their family for a few thousand to keep the lights on, but a few thousand can only do so much. At the time a few people like John Bryan, Bill Draper, Bill Edwards and Reid Dennis realized that.
They decided to pool their money together and invest heavily in 5–10 big companies, in the hopes that even if most don’t make it big, the ones that do make it will make enough to cover the losses of the other companies, and still make a profit. They made the first venture-capital firm.
Sutter Hill Ventures was the first VC firm and it saw unparalleled success.
This created a frenzy where everyone in the valley with some money and some friends started to use this business model. Sutter Hill had made it look like their portfolio was almost as profitable as a real-estate portfolio.
A paradoxical relation between VCs and companies started to form. As new companies emerged, more VC firms opened up to get a slice of the proverbial investing pie. New VC firms opening signalled to other entrepreneurs to start their company since funding was available. This paradox is still profitable to this day.
Now Silicon Valley had a history of technological innovation since the war which continued well after the war ended, cheap living which caused more and more people to move to the bay area, and people with money were willing to spend it. This caused a massive snowball effect that took over California.
With the widespread adaptation of technology being very slow in those days, the area of Silicon Valley was exposed to all this. They had sufficient time to create their own innovation that would compliment the existing model before these innovations spread to the rest of the planet. When it did, all the big companies were on-board the metaphorical train that took it global.
Innovation in Silicon Valley was like a virus, but for a while, it stayed confined to the valley where some pathogens mutated. But once it became an epidemic both the primary virus and all the mutated pathogens spread simultaneously. Silicon Valley is ground-zero of today’s technological innovations.
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