The Entire History of Silicon Valley

Hey y’all — Silicon Valley is the greatest innovation ecosystem the world has ever seen… but how did it actually start?

Why did Apple, Google, Facebook, NVIDIA, OpenAI, and more all choose to base themselves in the same region?

And even though you know Elon Musk, you might not have heard of foundational figures like Frederick Terman, William Shockley, or “The Traitorous Eight”

I spent hours this week researching why, over the last 112 years, a unique culture that mixes innovation with risk taking has emerged in the Bay and how it’s led to over $14 trillion in value being created by startups based there.

Here’s the full breakdown:

The Entire History of Silicon Valley

The Beginning

The year is 1913 and, if you want to send a message to your friend who lives far away, you send a telegraph. But out in Palo Alto, California a researcher at the Federal Telegraph Company named Lee De Forest has just invented the vacuum tube amplifier.

All of a sudden you can make weak electrical signals as loud as you want, which means long distance telephone calls and radio broadcasts become possible. De Forest didn’t realize it at the time, but he’d also just set in motion a chain of events that would lead to thousands of startups being created in the San Francisco Bay Area that are worth over $14 trillion dollars today as part of the most successful innovation ecosystem the world has seen.

Culture of Innovation

But first, right down the road at Stanford University, a professor named Frederick Terman soon begins encouraging his best students to start companies rather than go into academia themselves. He works to connect the students to wealthy individuals and corporations that can help fund their ventures.

Terman had seen firsthand how the boundary-pushing research done at top universities like Stanford wasn’t being applied practically in people’s everyday lives.

His desire to bridge that gap and accelerate societal progress births the unique culture of Silicon Valley that mixes innovation with risk taking. He’d later become known as the Father of Silicon Valley and you can see why — the first Silicon Valley startups and venture investments would not have existed without him.

Two of his students were William Hewlett and David Packard — the founders of HP, worth $30 billion today.

Early VC + Semiconductors + Traitorous 8

Fast forward to 1957. Terman’s ideas were a hit and had attracted many top military-trained engineers to the region to build or join companies after WW2.

Yes, it’s true, these days you have Google employees protesting any involvement between big tech and the military, but many of the foundational companies of the valley were built by ex-military engineers.

Anyway, at the same time two key things happen:

First, the government passes the Small Business Investment Act which let anyone create a type of investment fund that would receive 100% matching funds from the government of any that they raise on their own. Sounds great, but it comes with strict limits on the size of the fund, limiting the upside. It spurs a lot of interest in venture funding, but the limited fund sizes means private funds become the major players.

Second, this happens in tandem with the invention of the transistor — basically a smaller, more reliable and scalable replacement for De Forest’s vacuum tubes. One of the inventors was William Shockley who takes Terman’s advice and starts the creatively named Shockley Semiconductor Laboratory to commercialize transistors.

However, Shockley is allegedly a terrible boss who refused to listen to his engineers and eight of his best engineers leave to start a competing company — Fairchild Semiconductor.

Fairchild gets $1.5 million in funding to start the company from investor Arthur Rock, and he names them “The Traitorous Eight.” This is arguably the first true VC deal since it’s an investment in a team without a product or established business.

Arthur Rock + Power Laws

It’s seen as the highest risk investment in a startup yet, but Arthur Rock does the deal because he’s realized something the rest of the world doesn’t understand yet:

Making money from investing in startups follows a power law distribution, with many failures and a low number of extremely large, outlier successes. Most investors are thinking about a typical normal distribution, with roughly the same amount of successes and failures, but not Rock. His strategy lays the foundation for all venture investing, even today.

Enjoying the story so far? Check out the video I put together telling it in full:

The Sixties

Fairchild ends up being so successful that it births additional companies like Intel, AMD, and more — they were basically the PayPal Mafia 30 years before Elon Musk and Peter Thiel teamed up.

They also created something called the integrated circuit — basically a silicon computer chip that allows multiple transistors to work together. Integrated circuits form the basis for all computer chips and lead to a reporter named Don Hoefler deeming the region Silicon Valley in 1971.

The Rise of Institutional VC

Now, Arthur Rock had formalized early-stage tech investing and understood that outlier successes follow a power law distribution. It took a few years, but in 1972 other people figure it out too.

That year, Don Valentine founds Sequoia Capital and Eugene Kleiner founds Kleiner Perkins — two iconic VC firms that are still leaders in the industry today with billions of dollars under management after early investments in Google, Apple, Amazon, Uber, Airbnb, Twitter, YouTube, LinkedIn, Instagram, NVIDIA, TikTok… you get the idea.

Initially Sequoia takes a more hands off approach, but initially Kleiner’s is slightly different — they’ll provide the capital to a visionary founder, on the condition they get to pair them with an experienced and business-minded co-founder. Today, it’s extremely rare for a VC to choose your co-founder but this is the birth of the dynamic that’s still very common where one founder is technical and one isn’t.

The PC Revolution

By the mid 70’s, momentum in the Valley is building — more and more smart people are following Frederick Terman’s vision and choosing entrepreneurship to commercialize breakthough technologies.

Intel, a Fairchild spin-off, commercializes microprocessors which power the first wave of at-home, personal computers.

And two of those smart people, Steve Jobs, Steve Wozniak, form Apple to build them.

Around the same time, Bill Gates and Paul Allen form Microsoft to build the software for both Apple and their main competitor, IBM.

The undeniable success of all three companies — IBM, Apple, and Microsoft — is against the backdrop of capital gains tax reductions from 49% to 20% in the US which encourages a dramatic rise in the money being poured into venture capital and, therefore, the number of startups being formed.

The Internet Age Begins

While all this was happening, the internet was quietly being created.

In 1969 DARPA launched ARPANET which allowed Stanford, UCLA, and two other universities to break down and send large data files back and forth via a technique called packet switching, a fundamental improvement on traditional phone networks which were built on circuit switching. For the first time, data being sent could be broken down into smaller parts, making transmission easier and more flexible.

Researchers Vinton Cerf & Bob Kahn use it to create an efficient network called TCP/IP that you might be more familiar with than you tink — your IP address handles the path data packets take while TCP ensures they get where they’re going, and in the right order.

VCs are initially more focused on personal computing but then, in 1989, British CERN researcher Tim Berners-Lee invents the World Wide Web.

This fully realizes the vision for what a connected network could be — it uses TCP/IP but gives every address a readable name — like google.com — and lets users create custom-designed pages using a language called HTML that load when someone pings their address.

You have to remember, before this there was no such thing as websites, URLs, or a web browser.

And so all of a sudden, the internet race is on.

VCs, who have already started shifting their focus away from hardware and into software due to it having better margins (and therefore lower risk and, in theory at the time, a better chance of being a power law winner), love the internet’s potential.

Kleiner Perkins invests in Marc Andreessen’s company Netscape — which becomes the dominant browser of the 90’s and whose 1995 blockbuster IPO sends shares soaring from $28 to $75 on the first day and demonstrates to all investors from Palo Alto to Wall Street just how massive the internet could be.

Dotcom Boom and Bust

As a result, things go a little crazy.

VCs are able to raise, and deploy, billions into new startups. They’re betting that the first company to tackle each new idea on the internet will be successful, rather than finding sustainable business models first.

It’s a speculative bubble to the degree where companies are able to go public despite burning millions of dollars, fueled just on the belief that the internet will transform everything.

But bubbles don’t last forever and, by 2000, many internet companies are running out of money. Pets.com spends $4 million on Super Bowl commercials but was out of business 9 months later.

The NASDAQ loses 78% of its total value between March 2000 and October 2002. Trillions are lost from investments in companies that were building things despite ignoring the golden rule — make something people want.

Many investors get scarred and, unfortunately for Silicon Valley, funding dries up.

But not all companies fail. Dotcom darlings Amazon, Google, PayPal, and eBay survive through extreme determination, a focus on revenue, and restructuring.

And the investors who didn’t get wiped out have gotten a reality check — for the next 20 years they go back to focusing on business fundamentals as well, not just hype.

And it turns out that the internet does have some interesting business models to be discovered — Facebook, YouTube, and LinkedIn are founded as part of the second wave of internet companies.

Make Something People Want

Despite the carnage, there are some people focused on making things people want.

In 2005, Paul Graham, Jessica Livingston, Robert Morris, and Trevor Blackwell launch Y Combinator.

Unlike most VCs, they decide to exclusively invest very small amounts of capital for small equity stakes extremely early in a small number of startups’ journey at the same time as each other. And while they don’t require any operational control or veto rights, unlike some VCs at the time, they bring the founders together in person and directly mentor them in a “batch” format.

This is a new level of risk taking that takes the idea of the power law to its extreme — YC doesn’t need control or big equity stakes, they know the financial returns from investing as early as they do create an environment where success is binary — either they’ll make billions on a startup or nothing, and they only need a few to succeed for their model to work.

They call it an “accelerator” and, while unorthodox, the founder-friendly model attracts thousands of applications and is a massive success, leading to the creation of Reddit, Dropbox, Stripe, and many more startups.

They also pioneer Demo Days, where every startup in their current batch pitches to a large number of investors at once. This creates bidding wars and shifts the leverage in Silicon Valley from investors to founders. For the first time, investors had to fight to get into deals instead of founders fighting for capital.

The Power Shifts to Founders

The capital crunch doesn’t last for too long, though.

Netscape’s Marc Andreessen and Ben Horowitz go on to co-found the venture firm a16z and raise millions on the back of the thesis that “software is eating the world” — their belief is that it will dominate every industry.

It’s a venture firm that’s designed like Hollywood talent agency CAA, giving founders access to a full-stack support system — PR, recruiting, and more — not just capital, and without demanding control.

Simultaneously, we start seeing more examples of founders no longer being seen as replaceable by so-called professional CEOs. Instead, Mark Zuckerberg wears pajamas to some pitches, Google plays Sequoia and Kleiner Perkins off each other in a bidding war, and founders like Elon Musk, Adam Neumann, and Travis Kalanick are considered central the success of their startups.

The idea is that a founder has more authority and more skin in the game than a non-founding CEO ever can.

This is a complete 180 when you look back at how Steve Jobs had been originally ousted from Apple 20 years earlier.

The Mobile Revolution

By the time a16z announces their first fund, the world has already changed.

Steve Jobs, now back at Apple, launched the iPhone in 2007 and the App Store soon after. It kicked off the biggest shift in consumer behavior since the launch of the internet and opened the floodgates for apps like Uber, Instagram, and WhatsApp.

This kicks off another round of money pouring into venture capital and, moreso than other industries, tech is largely immune to The Great Recession a year later — investors can tell the opportunity is too-big-to-ignore.

This time, though, the money isn’t just coming from US investors. The world has become aware of what’s been happening in Silicon Valley and, after seeing success after success, international VC firms like SoftBank begin competing aggressively for hot deals.

ZIRP and Global Spread

It wasn’t just international investors who wanted in, though.

The shift to mobile makes it blatantly obvious that Silicon Valley was more than just a one-time bubble. And the very technology Silicon Valley founders created make the ideas that power the valley much easier to spread organically.

Around the world, Silicon Valley’s “move fast and break things” mindset, and unique culture combining risk taking with innovation, gains popularity and startup hubs pop up in China, India, Europe, Latin America, and Africa along with elsewhere in the US too.

It’s become clear that the success of US tech startups in Silicon Valley isn’t because of geography, though the talent density that’s accumulated after nearly a century is certainly going to be hard for anywhere else to catch up to, but rather its because of Frederick Terman’s original idea to combine cutting edge research and technology with people’s everyday lives.

And now everyone else wants in. The ZIRP era of low-to-zero interest rates means investors are more content than ever to deploy capital into high-risk assets like startups.

With borrowing costs near zero, investors are willing to take bigger risks on high-growth, unprofitable startups — driving up valuations to unprecedented levels. At times it borders on feeling like the Dotcom bubble again, but this time founders have the leverage.

The Return to Reality

Both the founder-friendly mindset and free money of the ZIRP era come crashing down, though.

Unlike the Dotcom era, where many startups IPO’d before they were ready, the ZIRP era has the opposite problem — founders are preferring to keep their startups private for as long as possible to retain control, which is keeping investors from seeing profits for, in some cases, well over a decade.

And the high-profile, controversial ousters of Travis Kalanick at Uber and Adam Neumann at WeWork are seen as confirmation to investors wondering if founders have had too much leverage and are moving too fast, breaking too many things.

AI and the Future

With interest rates rising in 2022, the ZIRP era officially ended.

However, Silicon Valley has only kept accelerating despite VC funding being down.

Startups and their founders are more popular than ever — Elon Musk is a legitimate celebrity and building a personal brand is basically essential for ambitious founders, which is why my ghostwriting agency is helping more founders grow on LinkedIn, X, and newsletters than ever.

Additionally, Y Combinator’s ex-president Sam Altman co-founded OpenAI and has ushered in the largest shift since mobile.

As AI makes it easier to build products for less money, what does the future of venture capital look like?

Ironically we do know one thing — despite remote work showing successful startups can be built from anywhere, AI has brought most top talent back to the physical Silicon Valley.

But, over a longer time period, the trend is clear — the ideas and culture that have led to trillions of dollars in value and massive improvements to people’s lives coming out of Silicon Valley is changing the world and spreading globally.

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