History of Silicon Valley
The year was 1850 and The American whaling industry is booming whale hunting is an extremely risky business but it’s also incredibly lucrative each expedition costs a fortune and one-third of all ships don’t make it home but successful trips are returning 10 times the upfront investment so rich people start spreading bets across different whalers to delivery risk the plan works out and lots of investors get rich but eventually America stops using whale oil and switches to petroleum john D Rockefeller is the biggest winner during the oil boom and become the richest person in history by building the standard oil company the Rockefeller fortune gets passed down to his family and in 1946 his descendants are looking for new way to deploy all this capital so they start funding risky businesses but at this point they are really just treating these investments like charity and are not thinking like venture capitalists yet the first attempt at making money through early stage investing comes out of Boston a group called American research and development begins making investments in several military technology companies.
The First Startups In The Silicon Valley
It is a good proof of concept but startups that took money from ad were required to give up to 70 per cent ownership in order to receive funding even worse that are investment fund is set up as a corporation instead of a partnership which leads to all sorts of legal headaches including a raid by the securities and exchange commission but on the other side of the country a few san Francisco stockbrokers are forming a group to invest in technology startups they need a name so they call it the group fortunately for them they are better at investment than coming up with brand names and the founder of the group is able to turn fifteen thousands dollars into on million by invessting in a company that makes tape recorders analog technology would not last long though even in the sixties people could already tell that the future was digital and everything digital requires semiconductors chips now at the time all the best engineers are working for william shockley shockley is runningh a semiconductor company called Shockley.
The Invention Of Semiconductor
Semiconductor yet another creative brand name but shockley is a terrible boss so eight of his brightest employees decide to become tritors and leave the company fortunately there is a new venture capaitalist in town named arthur rock and he says let’s call these guys the traitorous eight and then gives the money to start fairchild semiconductor this looks really promising they are finally making silicon chips in silicon valley now ans the US government takes notice to see it is the cold war and the united States needs cutting edge technolgy to wint he space race so they start subsidizing venture funds known as small business investment companies this does not work though since each fund has to be smaller than four hundred and fifty thousands dollars and they can not give more than sixty thousands dollars to a single startup no one wants to work under these government limitations so the private sector has to step up to fill the void arthur rock was really on to simething with the tratorous eight though he made seven hundred thousand dollars and proved the convincing talented scientists to quit their jobs and start something nerw could lead to big innovation.
The Real Silicon Valley Rise
So he doubled down see rock recognized something that no one else did even though most new ventures would fail one big grand slam would completley cancel out all the mistakes normal distributions are what most people expected when thinking about likely outcomes you know the familiar bell curve but venture capital investing follows a power law with an extemely long tale of huge winners this tiny shift in mindset would dramatically change the way new businesses got funded it is still only 1968 but rock’s model is already working he winds up returing more than 22 times his initial investment which was enough to beat out warren buffertt’s performance at the time rock realizes that the power law is well extremely powerful no one is thingking about early stage investing this way so he repeats the formula snd helps two members of the traitorous eight start intel rock could not stary on top forever though two new venture capitalists just joined the party and we are about to chnage everything it is 1972 and two big v firms launch don valentine found sequoila capital and Eugene Kleiner starts kleiner Perkins both had worked at fairchild semiconductors and seen firsthand how the venture capital model could supershange new technologies but there is one big questions at this point how closely should vcs and startups work together traditionally the vcs had mostly just written checks and then turned the engineers loose to go build well slutter hill wants to test that theory.
Silicon Valley In The 1970s
So in 1973 they create the queue model which pairs a talented inventor with a strong outside CEO to help them build the business this model seems to be working so don Valentine fuds Arati which has some amazing game technology but is basically a complete mess on the business isde Kle4iner perkins also wants to get more hands on so they build tandem computers in thousand then spin it out into an independent startups but there is clearly more to silicon valley than just silicon computers chips and Klener perkins knows this so they fund genetech to cimmercialize recombinant dna technolgy it is a uper risky venture but by investing slowly onw stag at a time kleiner winds up building a new model for higley capi9tal intensive businesses it is 1977 now and wer finally get out first real household neme it is apple computers and suprisilngly stave jobs get rejected by lots of venture ciapitalists when he tries sto raise money that does not matter through because there is finally a network of vcs in silicon valley and if on says no you can just go to a different investor threee years later noth apple and genentech go public and yield massive progits for their investors everone in silicon valley is pumped are wants to double down on the venture model.
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