By Ryan Schatzman and Carolyn Pione
Coming next month: Thoughts on how our region can use its own strengths to create an economic engine.
Robert Metcalfe, co-inventor of the Ethernet, once said, "Silicon Valley is the only place on Earth not trying to figure out how to become Silicon Valley."
The thing is, economic change takes decades, and Silicon Valley is no exception.
It's been a few months since Ohio voters resoundingly renewed Ohio Third Frontier - a state program aimed at fueling the growth of companies - and jobs - in industries such as information technology, biotechnology, advanced manufacturing, fuel cell development and alternative energy. The program is already eight years old and has created 55,000 jobs, according to the state's count. But its work in transforming Ohio's economy has just begun to take root.
So, in an effort to remind Ohioans of the need for patience in changing our economy, we thought we'd provide some perspective with a little light summer reading that gives a brief overview of how Silicon Valley - an economic engine of jobs growth - has evolved over the decades.
Is Cincinnati the next Silicon Valley? Probably not. Can we create our own economic engine, based on our region's strengths, in the coming decades? Definitely. (More on that next month.) And since one of those strengths is brand development, can anyone think of a better brand name for us than the one coined by CincyTech executive-in-residence Mike Venerable, "Silicon Chili"? Actually, we kind of like it.
Recipe for Success
Silicon Valley has an incredible history, stretching back to the 1940s and '50s, as the epicenter of technological advancement for the U.S. What sets it apart is a culture of entrepreneurship that exudes competition, embraces flexibility and promotes the individual exploration of big ideas.
According to Dr. Morton Grosser, a venture capitalist and president of MG Consulting in Silicon Valley, the recipe for recreating that culture involved four key ingredients:
Strong Universities. Stanford and Berkeley, located in the heart of Silicon Valley, are top-notch technological research and teaching universities that breed great minds. US News and World Report ranks both schools in the top three engineering and information technology colleges in the country.
Entrepreneurship. The university has always been the focal point of the area's growth, because it creates smart young entrepreneurs with big ideas and the drive to pursue them. Their alumni have founded companies including Nike, Charles Schwab, Electronic Arts, Hewlett Packard, Intel, Yahoo!, Cisco Systems and Google.
Sources of Funding. Every new business needs funding in order to grow to meaningful size, and Silicon Valley's Sand Hill Road is the Wall Street of venture capital organizations. Wealthy families and individuals made investments in first half of the 20th century, and then the passage of the Small Business Investment Act of 1958 opened the door to the growth of venture capital.
A Unique Culture. The university-entrepreneur environment creates a horizontal, meritocratic culture, or one in which the strongest, smartest and most driven individuals rise to the top. There was no business landscape yet, so there wasn't a vertical system or bureaucracy in place to dictate the development of new ventures. Students and graduates had the freedom to explore all options and grow in every direction.
These ingredients sustain the critical mass that drives progress in the Valley. And the vision of Frederick Terman brought them together.
Foundations of Innovation
In 1909, Stanford University President David Starr Jordan gave Lee de Forest $500 to develop his Audion tube to transmit, amplify and detect radio signals. It was the first venture capital in the Santa Clara Valley, and the partnership set the stage for the mid-century innovation explosion in the region.
Terman, considered the "father of Silicon Valley," changed the way start-ups and universities worked together. As a Stanford professor of electrical engineering in 1925, he encouraged graduates to start their own companies and created a university-based environment to support their ambitions. He also encouraged professors to consult for start-ups, made technology transfer and intellectual property documentation easier and established the university as a hub for collaboration between entrepreneurship, collegiate research and government investments.
Bill Hewlett and David Packard were among the first to take Terman's advice about starting their own company. Hewlett created an audio oscillator in 1938, or a circuit that generates different frequencies. Terman convinced Packard to quit his job at General Electric in New York and return to California and work with Hewlett on the new breakthrough.
Terman, acting as a primitive venture capitalist for the pair, raised $1,000 from Perry Gyroscope to fund their project. They started HP in a garage on the side of their house; their first major client was Walt Disney, who commissioned them to build four audio oscillators so he could film "Fantasia."
Four years before he was named Stanford's provost in 1955, Terman proposed the lease of university lands for use as an office park to provide employment opportunities for graduating students and accommodate rising demand for start-up businesses. The Stanford Industrial Park (which later became the Stanford Research Park) in Palo Alto limited leases to high-tech companies, and Terman helped civilian technology start-up companies find venture capital funding.
The park now has more than 160 buildings, including HP and Facebook headquarters, with 23,000 employees that work for 140 different companies.
After Terman planted the seeds for growth, William Shockley played a major role in the transformation of Silicon Valley. He founded Shockley Semiconductor Laboratory in 1956 to replace de Forest's vacuum tubes and introduced silicon to the Valley as the best material for making transistors. When he decided to discontinue research on silicon transistors, eight engineers left Shockley to start Fairchild Semiconductors. Rockefeller Brothers invested in the company, making it the first venture-backed start-up in the area.
Over the next 10 years, Fairchild Semiconductors spawned more than 60 spin-off companies and a brotherhood of innovation that became the driving force behind the acceleration of Silicon Valley.
Culture Breathes Life
The emergency of an entrepreneurial culture was by far the most important component to success in the Valley. The area was densely populated with talented, young and inexperienced engineers who wanted to build a new industry rooted in semiconductors that was nothing like the way businesses were run on the East Coast.
Many of these engineers left their homes or families in the Midwest to work at Fairchild Semiconductor or explore other opportunity, so they had the freedom to experiment not just with technology but with how their companies ran. The sense of community brought them together geographically and instilled a desire to work harder together. According to Annalee Saxenian in her book "Regional Advantage," a "Fortune" magazine writer who visited Silicon Valley in the 1970s credited the openness in the region partially to geographic location.
"The relatively close proximity of companies makes associations easier...That kind of a close-knit community where a meeting affecting, say, the semiconductor industry brings out company presidents by the dozens was unlikely to arise in sprawling Los Angeles or in the Boston area, where companies are widely scattered."
Don Hoefler, who coined the term "Silicon Valley" in his publication "Electronic News" in 1971, talked about the emerging cultural community: "This common ancestry makes the semiconductor community there a tightly knit group. Wherever they go, ex-Fairchilders retain an awesome respect and emotional attachment to their Alma Mater. Despite their fierce competition during business hours, away from the office they remain the greatest friends."
Everyone worked feverishly to raise the bar of the entire industry, driven by a spirit of helpfulness - CEOs called each other to discuss problems, executives took time to help entrepreneurs, and professionals networked to forecast trends. They grew a community of allies that both supported and competed against their businesses and flattened the tall hierarchy of traditional corporate business by opening clear communication and sharing information. Failure was respected as part of business development, and paths to success were opened through collaboration that grew from shared failures. It's a culture that lives on today.
Quick success and multiple failures also created a high rate of mobility, and people were hungry to find and solve new challenges. Bouncing from companies to start-ups presented new opportunity, which led to the ultimate technological challenge that still drives progress in the Valley today: the power of the computer chip.
Betting on Chips
Industrial change underlying the valley's development, beginning in 1970, was the need to pack more power into a chip as people slowly realized what computers could do for them. Hardware, networking, storage and software are all rooted in the Valley, which poses a challenge for outside development of comparable technology.
In 1965, Gordon Moore, the director of Research and Development at Fairchild Semiconductor, stated that the number of transistors that could be attached to the integrated circuits that Fairchild was working on doubled about every two years, and predicted that this would continue for at least the next 10 years.
Moore's Law describes the sensational growth that propels development in the Valley region even to this day. Moore founded Intel with Andy Grove and fellow Fairchild founder Robert Noyce in 1968, and together they released the first commercial microprocessor in 1971. AMD was founded in 1969, another Fairchild spinoff, and is still one of Intel's largest competitors.
Both companies expanded through the 1980s, revolutionizing micro computing and random access memory and spurring the race to produce faster, more versatile chips. Faster chips accelerated the development of related technologies, and Silicon Valley quickly became home to attractive investment opportunities.
Enter Venture Capital
Sand Hill Road is to the venture capital industry what Silicon Valley is to high-tech business. Early venture capitalists such as J.H. Whitney and Laurance Rockefeller funded start-ups with family money. It wasn't until Congress enacted the 1958 Small Business Investment Act (SBIC) that investment firms started to spring up in the area, attracted by growing semiconductor and microwave start-ups.
Steve Blank catalogued the evolution of venture capital in Silicon Valley in his blogpost "The Secret History of Silicon Valley 12: The Rise of Risk Capital."
Before risk capital and venture investments, the only way to finance a start-up was with government backing, bank loans, partners and personal connections. Terman was a vital asset to early start-ups in the region because he leveraged his connections to find funding for new entrepreneurs. The SBIC Act ushered in a new attitude about private investing because the government matched investment in small businesses three-to-one for every dollar.
Business investments and exits were tricky, however, because there was no formal way to structure an investment firm outside the SBIC guidelines. The emergence of limited partnerships was like rocket fuel for venture capital because they limited the life of fund investments, charged management fees, procured positions of leadership on start-up management teams and collected a percentage share of the profits.
Silicon Valley Today
Fast forward three decades, and the Valley is still on the cutting edge of innovation, technology, and the availability of risk capital. Today it is home to Google, as well as the biggest social media and networking sites as well as the next big thing. In addition, micro processing is evolving into molecular processing to handle larger amounts of complex data on smaller chipsets.
The trend is shifting from creating to sorting and organizing information because now everyone who touches a computer has a vision of their own to explore.
RESOURCES:
http://www.netvalley.com/svhistory.html
http://people.seas.harvard.edu/~jones/shockley/sili_valley.html
http://en.wikipedia.org/wiki/Silicon_Valley
http://www.netvalley.com/archives/mirrors/terman.html
http://en.wikipedia.org/wiki/History_of_private_equity_and_venture_capital#Early_venture_capital_and_the_growth_of_Silicon_Valley_.281959_-_1981.29
http://en.wikipedia.org/wiki/Stanford_Research_Park
http://steveblank.com/2009/10/29/the-secret-history-of-silicon-valley-12-the-rise-of-%E2%80%9Crisk-capital%E2%80%9D-part-2/
CincyTech is a public-private partnership whose mission is to invest in high-‐growth startup technology companies in Southwest Ohio. |