Venture Capital Helped Create Silicon Valley and Startup Culture fact

How Was Silicon Valley Created?

Venture capital, which was just emerging in the late 50’s, helped create companies like Intel, which in turn created Silicon Valley and startup culture.

Silicon Valley-based companies created the silicon-based integrated circuit, the microprocessor, the microcomputer, and a lot of technology that encompasses modern computing. These companies, with help and direction from early Venture Capitalists, working with technology created by the military, and with the support of government, created the modern startup culture.

A Quick History of Silicon Valley

The history of Silicon Valley has a few key points of origin.

The Intellectuals, and a Small Circle of Friends

When we look at the history of computing we can look at intellectual powerhouses like Ada Lovelace and Charles Babbage, and we can look at the devices created by past intellectuals like the Antikythera Mechanism.

We can look at Alan Turing’s work for the British, and we can even look at old mathematics theories and a bevy of scientists and historic inventions.

We can even skip all the way to the Intel story. 

But before we do any that, we have to point out two important partners in the history of technology, the Department of Defense and intelligence agencies and the venture capitalists.

These governmental and financial groups funded the first rounds of computing technology, taking the brightest minds and funding their ventures in an effort to outpace the technology of the Axis (in the war) and the other capitalists (at home).

The Government

The degree to which big government laid the groundwork for our modern technological boom can’t be understated, in fact if you look a little closer at figures like Turing, nothing could be more obvious. The main thing that explains the modern progressive era and America as a superpower as the coalition of big government, big money, intellectuals, and countless boots on the ground going into hyperdrive, inventing and producing like their life depended on it (it did).

The secret history of Silicon Valley. Before there was venture capital, there was a war to win. How did we win the war? There are lots of answers, but advances in computing technology and computing greats like Alan Turing comprise many of those answers.

The Venture Capitalists

After WWII private venture capitalists took on the role of the government, becoming the funders and finders of new tech.

Wall Street, Congress, the Universities, new venture capitalists, and the scientists working on the factory floor would all come together to form the Silicon Valley we know today. Out of this next wave of innovation by the private sector came Noyce, Moore, and Rock, some of the masterminds behind Intel (one of the first major tech companies).

Moore, Rock, Noyce

Before Robert “Bob” Noyce and Gordon Moore started Fairchild Semiconductor in 1957 and then Intel in 1968 with the help of venture capitalist Arthur Rock, people didn’t just “start companies”. Before this time companies were traditional top-down hierarchies, lower-tier employee input wasn’t respected, and employees weren’t offered stock options as compensation (giving employees a stake in the company).

Be it the Military, Noyce, or Rock o his investors the same idiom rings true: Nothing ventured, nothing gained. Below is the story of how Venture Capital created Silicon Valley and the modern startup culture.r

What is Silicon Valley?

Silicon Valley is the nickname for the bay area in-between San Francisco and San Jose. It got it’s name from the fact that computer company startups (who used, created, and innovated silicon “computer chips”) were centered in the Santa Clara Valley in San Jose. Today the term Silicon Valley is used to describe both the entire tech community that arose out of the valley or the whole current San Francisco / San Jose area where tech companies still reside.

A video about Silicon Valley today.

FACT: As of 2015 San Francisco and San Jose account for more than $10 billion in venture investment, roughly 40 percent of all dollars invested, along with 30 percent of all venture capital deals.^[1]

What is Venture Capital?

Venture Capital is capital used for risky ventures, or rather, it is money that is raised by a group of investors who together have the “Rolodex” and “bankroll” to invest in innovative business and entrepreneurs.

A video looking at “what is venture capital“.

FOOD FOR THOUGHT: Not all the Silicon Valley companies used venture capital. Atari, the fastest growing company of the late 70’s and early 80’s was funded entirely by its founders Nolan Bushnell and Ted Dabney, using a Sears bank loan. It’s important to note in this regard that its founders struggled to expand the company despite Nolan’s business acumen. Nolan was so burned out by the experience that he sold Atari to Warner Communications in 1976. Eventually, Atari’s bad business choices spearheaded the North American video game crash of 1983. It’s arguable that Atari would have had a longer-lasting future had Nolan taken venture capital and the assistance that would have come with it.

Origins of Venture Capitalists

The use of capital to fund risky ventures was born out of the post-WWII ideology of people like Georges Doriot, the “father of venture capitalism” who had worked to raise capital to help the returning soldiers startup businesses. Many of Silicon Valley’s venture capitalists picked up on Doriot’s ideas at his class at Harvard Business School. Others learned from his business partners from MIT.^[3]

A video where Arthur Rock (a student of Doriot and founder of Intel) discusses the history of startups with Gordon Moore (Moore’s law and intel).

FACT: One of the first steps toward a professionally managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S. Small Business Administration (SBA) to license private “Small Business Investment Companies” (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.^[3][4]

What is “Startup Culture”?

Startup culture refers to the culture that arose out of the Silicon Valley in the late 60’s and early 70’s where the emerging venture capital market coincided with the emerging computing market.

The mix of venture capital and technology allowed the brightest minds in tech to form companies using “collectively raised capital from investors” rather than “old money from a single source” directly. This allowed for those trying to escape the top down structure of traditional “east coast” companies to build and run their own “west coast” companies for the first time.

The venture capitalists had experience in business while the former employees knew technology. The pairing of venture capitalists and the new entrepreneurs created businesses that did away with the traditional business structure in many respects.

The new startups, which emerged in Silicon Valley, rebelled against the old top-down east coast business culture ruling by boards rather than bosses, valuing employee input, and offering stock options as compensation (giving employees a stake in the company).

Before Startup Culture

Underdog entrepreneurs have started up businesses in America since long before Silicon Valley. We can look back as far as history goes for great business innovations, and we can consider entrepreneurs like Henry Ford or Rockefeller (both who came from humble backgrounds) to be some of the pioneers of startup culture. Ford and Rockefeller both created companies using hard work and ideas that pushed against the norm at the time. Ford even broke barriers for the first time by taking innovative steps like raising wages for employees to double what the other companies paid.

New tech companies emerged like IBM in 1880, Texas Instruments in 1930, and Hewlett-Packard in 1939.

A close look at any of the aforementioned companies doesn’t exactly shout Yoga room where all employees can eat organic snacks and contribute ideas as equals. The mentality of almost all large businesses from the industrial revolution to the 60’s was that the higher ups had the power and wealth and the workers worked long hours as a cog in the machine. Despite breaking the mold and pushing technology forward in many respects, this was as true for Ford as it was for IBM.

The History of Intel and the Birth of Silicon Valley and Startup Culture

The history of Silicon Valley, modern computing, and the current startup culture can all be traced to one set of events, which begins when Robert Noyce (physicist and co-inventor of the integrated circuit) and Gordon Moore (chemist and creator of “Moore’s Law”) meet Arthur Rock (venture capitalist).

A video about how Robert Noyce and the rise of Silicon Valley.

Shockley Semiconductor

Noyce and Moore had been innovating semiconductors (the things that make computers work) at William Shockley’s Shockley Semiconductor Laboratory, a division of Beckman Instruments.^[5][6]

Shockley was the co-inventor of the transistor and an eventual Nobel Prize winner. Despite a good five years of important innovation in computing Noyce, Moore, and six others grew tired of Shockley’s business practices (like his shying away from working on semiconductor tech) and the way they were treated at the company. Together they formed the “traitorous eight” defectors from Shockley Semiconductor.

Arthur Rock and the “Traitorous Eight”

The eight were ready to leave Shockley and work on a semiconductor, but they had no funds until they got the help of struggling venture capitalist and ex-Georges Doriot student Arthur Rock. Arthur convinced Sherman Fairchild to expand past the Camera and Instrument business and open up a semiconductor division.^[5][6]

Fairchild Semiconductor

In 1957 Noyce left as the leader of the “traitorous eight” and co-founded Fairchild Semiconductor in San Jose with the help of Sherman Fairchild and his Fairchild Camera and Instrument Company.

Over the next ten years “the eight” under the leadership of Noyce, refined their skills doing things like inventing the integrated circuit (IC) (a small electronic device made out of a semiconductor material (typically silicon), I.e. a microchip).^[5][6] NOTE: The IC is typically credited to both Noyce and Jack Kilby of Texas instruments although the market ultimately preferred Noyce’s version.

Noyce’s success in the company allowed him the power to build his business and technological skills. His treatment of his team was heavily influenced by his own frustration at being held back by a top-down structure.

Despite moving up through Fairchild Noyce faced two major problems along the way. Firstly, the eight kept leaving to start their own “startup” companies, arguably due to not having a stake in Fairchild. Secondly, the other managers and higher-ups pushed back against his ideas, especially when sales waned.

By 1968 Robert Noyce and Gordon Moore were the only two of the eight left at Fairchild. Noyce, unhappy with the direction of the company, convinced Moore to leave with him to start their own startup company like many others at Fairchild had done.^[5][6]

The Origin of Intel

Noyce and Moore knew they wanted to create semiconductors but they didn’t know how they would get the money to “start up” a company. Again, they turned to their friend Arthur Rock for advice on how they could raise $2.5 million to start a semiconductor company.

Arthur used $10,000 of his own money and $2.5 million raised from contacts to fund the creation of NM electronics (which would two years later get renamed Intel).^[7]

Fun Fact: Moore and Noyce considered calling the company “Moore Noyce”, but thought that relating noise with computers would be bad for business. Now if they had only called it “Moore Rock Noyce”…

Noyce and the Birth of the Modern Company

By the time Noyce was put in charge of Intel (along with a board that included Rock) he had over a decade of experience of being pushed around by the traditional top-down structure of the companies that he had worked for. It was with this in mind that he ensured that Intel would be a company which shared it’s profits with it’s employees and treated it’s employees with respect. Not only did Intel become one of the first true west coast tech companies, the others who had worked with Noyce started their own similar companies (many of whom “started up” before Intel).

A lecture by Robert Noyce on the Impact of Integrated Circuits (microchips). What a better way to learn about it all?

The Future of the Startup and Tech

Only a few short years later Apple and Microsoft would emerge in the same valley, with the same mentality, and the same venture capitalists. From 1975 to 2015 we get Yahoo!, Cisco, Adobe, Google, Facebook, Twitter, Uber, and the 9 out of 10 who didn’t make it.

The contributions that Silicon Valley has made to tech are undeniable, the role that Venture Capital had in shaping Silicon Valley is also undeniable, and the impact the combination had on modern startup culture is just as clear. When we look at the modern tech culture, there is no better place to look for an “ah ha” moment than the story of Intel.