Finfox is a free financial modeling and planning tool for startups and small businesses. It allows early stage founders to create financial forecasts for fundraising and business scenario analysis. Finfox is fully integrated with Google Sheets which allows complete flexibility and easy collaboration. Using Finfox can save founders thousands of dollars in CFO consulting costs and countless hours fiddling with generic Excel templates. Learn more at www.finfox.co

The Transformation of Silicon Valley

The Transformation of Silicon Valley

In their Harvard Business School case entitled The Origins and Development of Silicon Valley, Professors Tom Nicholas and James Lee identify 10 reasons why the Santa Clara Valley became a hub of tech innovation. These factors shaped the Bay Area from a largely agricultural economy to the thriving entrepreneurial and technological region it is today.

1. Stanford University

Stanford University was founded in 1891 on the principles of practicality, inclusion, and openness. The curriculum focused on a “useful” education, based heavily in engineering and the sciences. A counterpart to Ivy League universities, Stanford University was a pioneer in its strong ties to local industry, creating an overflow of human capital that enriched nearby firms. Stanford graduate and “The Father of Silicon Valley”, Frederick Terman took a three-part approach to achieve his goal of a solid bond between academia and private enterprise: people, money, and physical plant. He was keen on having nearby prominent industry leaders visit campus, so they could have access to the brightest engineering minds around. This exchange of ideas and encouragement of entrepreneurship was noticed by the East Coast, where such practices were nonexistent.

 
Courtesy of Stanford Medicine.

Courtesy of Stanford Medicine.

 

2. Geographic Environment

Unlike the universities founded on the East Coast, Stanford University was located on a sun-washed 8,000 acre plot of farmland and orange groves. The physical distance from East Coast, as well as the location of the Pacific Ocean on the West and the San Francisco Bay on the East, fostered a unique environment suited to collaboration.

3. Innovation, Management, and Labor Culture

Silicon Valley innovated a more open and less structured work culture, emphasizing the importance of collaboration. The principles of individuality, egalitarianism, and the lack of formalism in ham radio clubs found their way into nontraditional new enterprises. Without commercial precedent and the hierarchical corporate culture of the East Coast, a new culture of experimentation, openness, and collaboration-mixed-with-competition arose.

4. Approach to Entrepreneurial Finance

The methods of raising funding were also unconventional, as firms sought backing from private investors instead of banks. The rise of venture capital began in 1909 with FTC; it was essentially technical knowledge with monetary support. In 1938, Hewlett and Packard received their initial funding from Stanford's engineering department. This method of fundraising grew dramatically in the following decades.

 
Courtesy of the Hewlett Packard company, HP memory project. 

Courtesy of the Hewlett Packard company, HP memory project. 

 

5. Significance of Links to the Military

The technical products of Silicon Valley had been in military use since WWI, and there was a growing market during WWII and the Korean War. Along with federal money from the Department of Defense, Silicon Valley received an influx of human capital, with the Bay Area overtaking New York City in military contract spending. In Bay Area fashion, many new firms were launched to compensate for increasing military needs.

6. Agglomeration Benefits

Possibly the world’s most successful agglomeration, many tech firms and entrepreneurs relocated to the Bay Area for its abundant capital in technical knowledge as well as its proximity to similarly focused ventures. There was a “spillover” of knowledge, emphasizing the connected nature of local industry and universities. Many entrepreneurs exchanged ideas, and firms moved closer to major customers, clustered around San Jose.

7. “Re-invention” Relative to Route 128

The Department of Defense began cutting spending post-Korean War, sharply decreasing defense output in Silicon Valley and Boston’s Route 128. High tech firms in the Bay Area adapted by altering their product lines, while Boston was unable to recover from this loss of industry. The transition to a commercial customer base was propelled by the creation of Intel, founded by former Fairchild employees, many of whom built commercial-customer-focused ventures.

 

Number of Firms Founded in Each Decade in Silicon Valley (with over $100M in sales in 1992)

Courtesy of Harvard Business School.
 

8. Building on Early Advantages

The marketing of former military industries turned commercial ventures was aided by clientele including corporate and university-based research professors and scientists. This was seen in the laboratories which allowed customers to test out new products alongside engineers, as well as the articles regarding new ventures that were published in leading academic and industry journals. This culture of deep involvement was echoed in the ideal of egalitarianism that had become a trademark of Silicon Valley. Firms in the area continued to disregard formality and preferred a flat hierarchy, giving decision making power to those far down the chain of command, and having cross-department meetings. The goal was to avoid a “bureaucratic, East Coast” atmosphere, as employees were also given equity in their companies.

9. The Rise of Professional Venture Capital

As venture capitalism formalized in the 1960s-70s, more formal investors were drawn to the Bay Area’s market. The first professional venture capital firm in the area was Draper, Gaither & Anderson, which was established in 1959. Mike Markkula, a former Fairchild and Intel Manager, became an angel investor in Apple in 1977. Venture capital grew from a network of businessmen to “a recognized industry of nationally-sourced money spurring growth in the Bay Area’s tech sector.” Venture capitalists in the Bay Area became famous for funding unproven people and firms, thriving on the excitement of uncertainty. The cycle of funding also become relatively quick compared to the East Coast's, and VCs also became highly involved in their ventures. Venture capitalists also became part of a valuable and central network in the Bay Area.

 
Courtesy of the Computer History Museum. 

Courtesy of the Computer History Museum. 

 

10. A Flourishing Cluster

The flourishing growth that defined the Santa Clara Valley was eminent in the 1980s, when the same resilience that had allowed its transition to a customer-centered industry fostered a booming growth. Compared to Route 128, the Bay Area had 50% more public high-tech firms, 11 times the high-tech sales volume, quadruple the number of high-tech manufacturing workers, triple the venture capital dollars, and 39/100 versus 4/100 of the country’s fastest-growing electronics companies. Companies that had started up on the East Coast soon relocated for easier access to the broadened market and experience of the Bay Area. Startups flourished at a much higher rate than the nationwide average, and older companies began inventing novel products.

 
Courtesy of TechCrunch.

Courtesy of TechCrunch.

 

Leland Stanford’s initial investment in the principles of practicality and usefulness have seen a great payoff, as the region’s high-tech industry continues to expand. Silicon Valley has exemplified resilience and persistence, easily undergoing economic transitions.

For more interesting articles about Silicon Valley technologies, visit the Finfox blog.

Thumbnail graphics courtesy of History San José and Business Insider.

What it means to work with Finfox

What it means to work with Finfox

Are Spreadsheets Slowing Your Company Down?

Are Spreadsheets Slowing Your Company Down?