HOW DID SILICON VALLEY BECOME SILICON VALLEY? Three Surprising Lessons for Other Cities and Regions a report from: supported by: 2 / How Silicon Valley Became "Silicon Valley" This report was created by Rhett Morris and Mariana Penido. They wish to thank Jona Afezolli, Fernando Fabre, Mike Goodwin, Matt Lerner, and Han Sun who provided critical assistance and input. For additional information on this research, please contact Rhett Morris at [email protected]. How Silicon Valley Became "Silicon Valley" / 3 INTRODUCTION THE JOURNALIST Don Hoefler coined the York in the chip industry.4 No one expected the term “Silicon Valley” in a 1971 article about region to become a hub for these technology computer chip companies in the San Francisco companies. Bay Area.1 At that time, the region was home to Silicon Valley’s rapid development offers many prominent chip businesses, such as Intel good news to other cities and regions. This and AMD. All of these companies used silicon report will share the story of its creation and to manufacture their chips and were located in analyze the steps that enabled it to grow. While a farming valley south of the city. Hoefler com- it is impossible to replicate the exact events that bined these two facts to create a new name for established this region 50 years ago, the devel- the area that highlighted the success of these opment of Silicon Valley can provide insights chip businesses. to leaders in communities across the world. Its Silicon Valley is now the most famous story illustrates three important lessons for cul- technology hub in the world, but it was a very tivating high-growth companies and industries: different place before these businesses devel- oped. When the computer chip industry was 1. Great companies can develop in unlike- emerging in the mid-1950s, there were no ly and challenging places. venture capital investors in the area.2 Stanford 2. A few entrepreneurs can make a large University did not produce any research on com- impact. puter chip components and the supply of local employees qualified to work with these high- 3. There is a framework for success that tech devices was almost nonexistent.3 The Bay leaders can accelerate. Area was far behind cities like Boston and New Lessons for Cultivating High-Growth Companies & Industries PHOTO ON LEFT: A RECENT VIEW OF SILICON VALLEY AT NIGHT BY FLICKR USER PETERTHOENY NIGHT BY AT VALLEY VIEW OF SILICON A RECENT ON LEFT: PHOTO • 1. GREAT COMPANIES 2. A FEW 3. THERE IS A CAN DEVELOP IN ENTREPRENEURS FRAMEWORK FOR UNLIKELY AND CAN MAKE A LARGE SUCCESS THAT LEADERS CHALLENGING PLACES. IMPACT. CAN ACCELERATE. Innovative businesses can A very small group of success- New companies can develop start up and become suc- ful founders has the power to rapidly when local entre- cessful in cities and regions spawn many companies that preneurs follow a cycle that that are far from ideal. create thousands of jobs. supporters can speed up. PHOTO ON COVER: FLICKR USER MICHAEL KAPPEL ON COVER: PHOTO 4 / How Silicon Valley Became "Silicon Valley" The San Francisco Bay Area was a very difficult place for the first computer chip entrepreneurs. THE BEST WAY to understand Silicon Valley’s suc- nancing, customers, and employees — that were cess is to follow the story of its creation. This story in short supply for startups like Shockley’s.11 In the begins thousands of miles from the Bay Area in mid-1950s, there were no venture capital firms in a laboratory where scientists developed the first the Bay Area.12 The U.S. military often acted as the computer chip technology. main funder and customer of high-tech compa- nies.13 However, at that time only a small portion A GROUNDBREAKING INVENTION. In of the military’s startup capital and sales contracts the late 1940s, a team of physicists at an AT&T went to electronics firms in and around San Fran- research center in New Jersey created the tran- cisco.14 The Bay Area wasn’t even the leader in its sistor, a new “semiconductor” device that could own state; Los Angeles and San Diego both re- control and amplify electric signals.5 The transis- ceived more funding for high-tech research and tor quickly began to replace other signal process- production.15 ing technologies. It became so important that its It was also difficult to find talented employ- three inventors were awarded the Nobel Prize.6 ees since engineers with semiconductor exper- In 1955, one of tise were concen- these inventors, a trated in cities that MIT-trained scien- already had transis- tist named William tor companies. The Shockley, decided Bay Area did have to leave the labo- a small cluster of ratory and start a tech firms, but these company that pro- companies worked duced transistors.7 with technologies Shockley consid- that were very dif- ered locating his ferent from those in company in Boston Farm workers drying prunes near Mountain View. the transistor.16 As or Southern California, but he eventually chose to a result, their employees lacked the knowledge return to the place where he grew up.8 In 1956, Shockley required. he started his new business in Mountain View, a Stanford’s engineering program was also small town in a farming valley 50 miles south of quite small. Fewer than 20 engineering PhDs San Francisco.9 graduated from the school the year Shockley started his firm.17 These graduates had little to no A REGION FULL OF CHALLENGES. experience working with transistors since Stan- Shockley’s decision was quite surprising. As the ford did not have a semiconductor lab.18 In addi- chart on the opposite page illustrates, the San tion, strict immigration policies prevented local Francisco area was far behind cities like Boston entrepreneurs from accessing talent from other and New York in the the computer chip industry.10 countries.19 In the 1950s and 1960s, immigrants Research has also shown that building a success- made up less than 10% of the area’s population ful company requires access to three things — fi- — the lowest level in the last 150 years.20 PHOTO AT CENTER: FLICKR USER CAMPBELL HISTORICAL MUSEUM & AINSLEY HOUSE CENTER: FLICKR USER CAMPBELL HISTORICAL AT PHOTO How Silicon Valley Became "Silicon Valley" / 5 DEVELOPMENT OF THE COMPUTER CHIP INDUSTRY’S FIRST TRANSISTOR COMPANIES Many cities were far ahead of the Bay Area. 21 22 18 15 8 4 Number of active transistor companies: 1951 1952 1953 1954 1955 1956 Cities with BOSTON BOSTON BOSTON BOSTON BOSTON BOSTON active transistor CAMDEN CAMDEN CAMDEN CAMDEN CAMDEN CAMDEN companies: NEW YORK NEW YORK NEW YORK NEW YORK NEW YORK NEW YORK SYRACUSE SYRACUSE SYRACUSE SYRACUSE SYRACUSE SYRACUSE PATERSON PATERSON PATERSON PATERSON PATERSON PHILADELPHIA PHOENIX PHOENIX PHOENIX PHOENIX DALLAS DALLAS DALLAS DALLAS NEWARK NEWARK NEWARK NEWARK PHILADELPHIA PHILADELPHIA PHILADELPHIA PHILADELPHIA ELMIRA ELMIRA ELMIRA LOSANGELES LOSANGELES MORRISTOWN MORRISTOWN KOKOMO Sources: Tilton, 52. Klepper 79-116; Endeavor Insight analysis. THE VALLEY’S FIRST FAILURE. Shockley These men were quite young — their average age worked hard to overcome these challenges. He was 30.27 Each was also hungry for new opportuni- secured financing from an investor outside the ties, which Shockley could provide. “It was like picking Bay Area, but talent was more difficult to find.21 He up the phone and talking to God,” said Robert Noyce, offered jobs to his former co-workers at AT&T’s one of the MIT PhDs. “He was absolutely the most research lab, but they refused to move to the re- important person in semiconductor electronics.”28 gion.22 (The local area was so rural that it lacked Although the company had a great team, it faced long distance telephone service.23) Researchers major problems before it could pursue customers. at RCA, another leading transistor company, also Shockley turned out to be a terrible boss.29 He insult- turned him down.24 ed employees and was so paranoid that he once or- Since he could not hire experienced employ- dered his entire staff to take polygraph tests.30 These ees, Shockley tried to recruit the best young talent actions doomed his business. After just one year, all that was available. He placed ads in academic jour- eight of the employees Shockley had worked so hard nals and traveled across the U.S. to meet graduate to recruit resigned on the same day.31 students.25 This search yielded eight promising re- Shockley’s company would shut down a few searchers and engineers who formed the core of years later. The departure of the eight researchers his new firm. They included three PhDs from MIT weakened the firm to a point from which it could not in Boston, a PhD and a professor from CalTech in recover. It also left a key question unanswered: was it Southern California, two engineers from the New even possible to build a competitive computer chip York area, and one local PhD from Stanford.26 company in the Bay Area? 6 / How Silicon Valley Became "Silicon Valley" A small group of ambitious entrepreneurs created the first successful chip company in the Bay Area. A NEW BEGINNING. Arthur Rock was a young the area, which made them willing to give it a try.35 banker working in New York when a colleague “We all owned our own houses then,” remembered handed him a letter that would reshape the comput- Gordon Moore, who was one of the eight research- er chip industry. It came from Eugene Kleiner, one ers. “It was a heck of a lot easier than going out look- of the eight employees leaving Shockley’s company.