Explain the development of Silicon Valley using the concepts of the strategic management of place presented

T O M N I C H O L A S J A M E S LEE

The Origins and Development of Silicon Valley

On October 1, 1891 as Senator Leland Stanford cut the ribbon at the ceremony gifting 8,000-acres of his Palo Alto, California, stock farm to a new, 559-student university bearing his name and seeking to produce “useful” in addition to “cultured” graduates, the majority of onlookers were orange groves and wildflowers.1 The population of San Mateo County was a mere 10,000—just 2% of the population of Middlesex County, MA, an area that would become another 20th century technology center (Exhibit 1).2 Fifty-seven percent of San Mateo was in farmland.3 There was, as Gertrude Stein would remark of nearby Bay Area city, Oakland, nearly 50 years later, almost “no there, there.”4 That is, it was a place with little social depth, identity, or culture.

Ironically, however, it was precisely this lack of structure in the Santa Clara Valley, combined with the region’s geographic characteristics, including its distance from the established, and arguably conservative, East Coast business world that would facilitate the rise of an entrepreneurial cluster of innovation and technological progress (Exhibit 2). The open air, sunny skies, and temperate climate of the largely undeveloped mountains that were packed tightly between the Pacific Ocean and the San Francisco Bay would combine with the fledgling university in the first half of the 20th century to attract a group of free-spirited engineers. With experimentation, openness, and collaboration-mixed- with-competition, the region became synonymous with a culture of entrepreneurialism.

Yet what factors, if any, made what was to become known as “Silicon Valley” unique? Other regions in the United States shared geographic endowments, other location-specific assets or culture, such as Lowell, New England in the 18th century with its fast paced water for power that spawned the early textile clusters, a thriving Cleveland in the 19th century with its networks of venture capitalists, entrepreneurs, and inventors, and Detroit in the 20th century with its focus on motor vehicles and the tire industry.5 Will Silicon Valley remain a vibrant community of technological innovation and economic growth, or will it decline like other previously thriving U.S. regions?

Foundation

A Unique University

The seeds of success enjoyed today by the larger, five-county San Francisco Bay Area were first sown in the late 19th century with the founding of a new university with a mission far removed from its Ivy League counterparts. At that October 1891 opening ceremony Leland Stanford declared to the pioneer class, “Life is, above all, practical,” and therefore his namesake institution’s students would not simply learn the Great Books, but also study “avowedly practical” subjects which would prepare

Professor Tom Nicholas and Doctoral Candidate James Lee prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

( D ecember 2017. )

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them for “useful career[s].”6 Moreover, the school’s doors would be open for not only men, but women as well. And its religious affiliation would not be that of a particular, Christian organization, but one of no denomination. It would, as founding President David Star Jordan echoed at the same christening, be “hallowed by no traditions, and hampered by none;” instead, in Jordan’s words, Stanford University would “point forward” in new, untraditional ways unseen at the leading academic institutions of the time.7 Thus, from its founding, Stanford was a different kind of university. Practicality, inclusion, and openness governed whereas abstract academics, discriminating admissions, and cultural rigidity were the standards elsewhere. This would play a crucial role in shaping the subsequent development of the surrounding Santa Clara Valley.

Stanford’s unique mission began shaping that area as the words “point[ing] forward” in a “practical, useful” manner quickly and unsurprisingly translated into the university actively promoting technical scholarship and invention among its faculty and students. When its doors opened in 1891, eight of the initial ten faculty appointments were in science or engineering.8 Among its students, the second- and third-most heavily enrolled majors of the original twenty-five disciplines were mechanical engineering and civil engineering. And in 1894, just three years into its operation, the university launched one of the country’s first electrical engineering departments.9 Hence, Stanford turned its distinct mission of promoting the practical into what its founder had originally envisioned: “an institution for civil and mechanical engineers on [his] grounds at Palo Alto.” This helped define the still rural Santa Clara Valley as a center of technical research.

Furthermore, Stanford also encouraged an extremely close relationship between academia and industry. In order for the university to be at the forefront of technical knowledge, it needed to know what the state of that knowledge was in the outside, non-academic world. From its earliest days, the university therefore fostered collaboration with industry and facilitated a fruitful, two-way flow of people and ideas from the classroom to technologically advancing firms. In the beginning, this meant populating engineering departments with individuals who had private sector experience. The 1894 opening of the electrical engineering department, for example, was led by Frederic Auten Combs Perrine who had just worked for several years in the nascent electricity industry.10 Once the university had been open for a few years, maintaining the two-way flow meant sending students and graduates into the fledgling technology sector of the early 20th century—particularly on the West Coast. The first radio station in the U.S. with regularly scheduled programming, for example, was setup in 1909 in San Jose by Charles Herrold who spent three years at Stanford.11 Similarly, the electronics components company Magnavox was started by one of Stanford’s earliest electrical engineering graduates, E.S. Pridham, with two colleagues in a Napa Valley garage in 1910.12 And perhaps more importantly in terms of training future Bay Area tech leaders, one of the earliest wireless telephone and telegraph service providers that would spawn more than twenty startups in the Pacific region, Federated Telegraph Company (“FTC”), was launched by a Stanford engineering student, Cyril Elwell, in Palo Alto in 1909, and hired as one of its chief engineers Leonard Fuller, the university’s first electrical engineering PhD.13 Hence, whether in radio, sound systems, or telecommunications, many of Stanford’s earliest students and graduates proceeded just as the university’s founder had hoped: into “useful” careers within technical fields.

Stanford provided more than just human capital to local, technical firms, however, as its relationship with FTC in particular highlighted; it supplied financial and physical space support as well. After being spurned by investors in New York, FTC’s founder and Stanford graduate, Cyril Elwell, obtained funding at his alma mater in the form of a 1909 investment from Stanford president, David Starr Jordan, and then chair of the civil engineering department, C.D. Marx.14 The university also opened up to the company the Stanford High Voltage Laboratory where, in collaboration with Professor Harris Ryan, the head of the electrical engineering department and a man with industry

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experience, FTC employees Roland Marx, the son of Professor C.D. Marx, and Leonard Fuller, the first electrical engineering PhD graduate, developed an antenna insulation which dramatically improved the quality of FTC’s wireless technology. In return, FTC donated a state-of-the-art transmitting device—a 12-kilowatt “Poulsen Arc”—for lab professors to use in the investigation of insulation characteristics inside porcelain, quartz, glass, and other materials. The professors’ work with the Arc was eventually published in a 1916 paper in the Institute of Radio Engineers Proceedings.15 Hence, the mutually beneficial relationship between Stanford and industry in the early 20th century extended beyond simply an exchange of highly talented individuals, and into the financial and physical realms as well. Together, these numerous and early channels of connection wed the advanced theoretical knowledge of a first-class university to the practical mechanical brilliance of nearby private engineering teams—a union that would help push the Santa Clara Valley into technological and economic prominence.

Of all the links between Stanford and industry in the early 20th century, however, none was as important in terms of laying the foundation for the surrounding region’s rise as an economic and innovation hub as the human link—that revolving door of exceedingly capable engineers and entrepreneurs. Many of the central figures in the mid-20th century ascent of “Silicon Valley” received their training at the university during the interwar years of 1920-1940. Ralph Heintz, for example, who in 1921 co-founded Heintz & Kaufmann (“H&K”), a short-wave radio devices firm that later manufactured vacuum tubes and trained some of the Valley’s best mid-century engineers such as William Eitel and Jack McCullough, was a 1920 Stanford engineering graduate.16 Eitel and McCullough went on in 1934 to found their own firm, Eimac, which became one of the U.S. military’s largest tube and radar devices providers during World War II.17 Not far behind Heintz was Charles Litton, who completed two Stanford engineering degrees—mechanical in 1924 and electrical in 1925—and in 1932 opened Litton Engineering Laboratories, another vacuum tube manufacturing company which counted as one of its first employees, David Packard—also a Stanford graduate (BA, 1934; MA, 1939). Packard would go on himself to become a Santa Clara Valley technology entrepreneur with yet another Stanford classmate, William Hewlett (BA, 1934; MA, 1939) when the two launched Hewlett-Packard (“HP”) in 1939 in Palo Alto. Lastly, in 1927, the university granted a master’s degree in physics to Russell Varian, who with his brother Sigurd, invented the klystron, a high-frequency vacuum tube critical to radar, telecommunications, and microwave technologies.18 The Varian brothers also founded in 1948 a firm—Varian Associates—which was one of the first tenants of the Stanford Industrial Park and whose employees subsequently started more than twenty high-tech companies in the second half of the 1960s.19 Hence, many of the key electronics entrepreneurs in the mid-20th century Santa Clara Valley received their technical training at Stanford.

Perhaps the most influential—in terms of contributing to the Valley’s subsequent rise—of all these 1920-1940 Stanford-educated individuals was Frederick Terman, also known as the “Father of Silicon Valley.”20 A 1922 Stanford graduate and FTC intern, Terman returned to his alma mater three years later as a professor—thus partaking in the increasingly common university-to-industry-to-university revolving door. In 1941, he became dean of the engineering school and in 1955, university provost. In these roles, Terman sought to create a “community of technical scholars composed of [engineers inside] industries using highly sophisticated technologies, together with [academics within] a strong university that is sensitive to the creative activities of the surrounding industry.”21 Hence, a solid bond between academia and private enterprise—particularly nearby private enterprise—was Terman’s goal.

To achieve it, he strengthened all three existing linkages between Stanford and industry: people, money, and physical plant. On the people front, he actively connected students with similar engineering interests and encouraged them to start their own electronics firms in the Santa Clara

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Valley.22 Terman also ensured that Bay Area electronics industry leaders were welcome on campus and frequent visitors. In 1936, for example, he appointed Charles Litton to a lecturer post in the electrical engineering department.23 As Terman hoped, this led to not only Litton regularly sharing his company’s cutting-edge vacuum tube processing techniques with Stanford students and faculty, but also Litton’s assistance in the establishment of both a vacuum tube laboratory on campus, which put Stanford at the forefront of vacuum tube research in the mid-1940s, and a physics department research group focused on the higher-frequency klystrons.24 Terman further convinced Litton to let one of Stanford’s brightest, young electrical engineering faculty, Karl Spangenberger, apprentice part- time in Litton’s Redwood City plant so that Spangenberger could bring back to campus the latest vacuum tube techniques.25 Beyond Litton, Terman maintained close ties to other Bay Area electronics entrepreneurs such as Ralph Heintz of H&K (Terman testified in court for H&K in a patent infringement lawsuit brought by RCA), Russell and Sigurd Varian of Varian Associates (Terman and two other Stanford Professors sat on Varian’s board and actively courted the Varians to open an office in the Stanford Industrial Park), Phil Farnsworth, a San Francisco television inventor for whom the Varians previously worked (Terman frequently visited and advised Farnsworth), and William Shockley (Terman sent electrical engineering professor, James Gibbons, to Shockley Semiconductor, a Mountain View silicon device fabricator, to “apprentice” after influencing Shockley’s decision to locate in the Santa Clara Valley).26 In short, Terman stood at the center of a growing web of technical entrepreneurs and university faculty and students in the Santa Clara Valley in the mid-20th century. This would ensure both that the academic institution he guided would remain at the forefront of commercial, technological knowledge, and that nearby firms would have access to some of academia’s brightest engineering minds. Such a mixing of human capital would go a long way in contributing to the region’s long-term economic development.

In addition to bolstering the people linkages between Stanford and industry, Terman also encouraged financial intermediation between the two groups. He promoted university investment— including of the endowment—in local tech startups such as HP, which received its initial $538 seed money from Terman’s engineering department in 1938.27 This stood in stark contrast to the refusal to fund new companies by Stanford’s East Coast, technical counterpart, MIT, which deemed such seed investing as “too risky and inconsistent with how men of prudence, discretion, and intelligence manage their… affairs.”28 Similarly, Terman obtained grant money for the university from local, private firms such as the $1,000 gift in 1938 from Litton to the electrical engineering department’s tube program.29 And Terman brokered joint ventures with nearby electronics companies that generated significant revenues for Stanford. For example, in 1937 he negotiated with the Varian brothers for the university to receive half of all profits from the brothers’ new microwave-using vacuum tube in exchange for the brothers getting access to Stanford physics labs and professors.30 Through such measures, Terman grew financial connections between Stanford and the technical industries surrounding it. In doing so, he further cemented the uniquely strong ties between the university and nearby, private enterprise in the mid-20th century—ties that again would have important long-term implications for the Santa Clara Valley’s technological progress and economic success.

The third link of the university-industry union that Terman grew dramatically was the provision and sharing of physical space. The Varian brothers’ arrival in the physics lab during the 1937 joint venture was just the beginning of a parade of industry men onto Stanford’s campus. In 1948, Terman designated a portion of undeveloped university land as the “Stanford Industrial Park,” which sought electronics and high-tech companies as tenants. The Varian brothers were the first to locate there when they opened Varian Associates that same year. HP followed a short time later. By 1961, more than 25 companies employing 11,000 people filled the 650-acre Park. Eventually even the more- established, East Coast firms such as GE, Eastman Kodak, Lockheed, and Xerox (PARC) opened Park

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branch offices.31 By comparison, MIT had no such office park. To bring the companies closer still to Stanford’s faculty and students, Terman initiated in 1954 the Honors Cooperative Program, which permitted engineers in local electronics firms to enroll directly in graduate courses.32 By 1961, 32 companies were sending more than 400 employees into Stanford classrooms on a regular basis.33 Again, MIT refused to offer a similar program and instead required a student to enroll in its full-time, resident degree programs.34

Off-campus, Terman furthered his vision of Stanford sharing space with industry in nearby Menlo Park at the Stanford Research Institute, which was founded in 1946 and populated with Stanford scientists “pursu[ing] science for practical purposes” and “assisting West Coast businesses” in ways that “might not be fully compatible internally with the traditional roles of the university.”35 Hence, in this particular endeavor, Terman himself recognized the new academic-industry bridges he was building. Overall, through all of these measures both on- and off-campus, Frederick Terman aggressively advanced the close relationship Stanford had with local technical firms in the mid-20th century by strengthening the spatial links between the two groups in ways unseen at other leading universities of the time.

By the late 1950s, outsiders were starting to take notice. Not only were major East Coast electronics and technology firms such as GE and Xerox opening Palo Alto offices, but public officials such as President Eisenhower’s Undersecretary of Commerce, Robert Williams, were deeming “the Stanford area” an innovation hub by referring to it as the “microwave [which was one of the period’s newest technologies] capital of America.”36 Investors expressed the same sentiment. Arthur Rock, the prominent venture capitalist remarked in 1961:

All of the energetic scientists were forming around Stanford. The reason for that, in my opinion—although some people will differ—is because of Fred Terman. He was the head of the engineering school at Stanford, and he encouraged his students, especially the doctoral and post-doctoral students, to form companies and continue to teach at Stanford. That was an unknown concept at any other school in those days—it certainly wasn’t happening at MIT, Harvard, or Princeton, or any of the good engineering schools. People got fired from MIT in those days if they started companies.37

Thus, by the mid-20th century, people outside of the Bay Area were growing increasingly aware of the close connections being forged between Leland Stanford’s “practical” university and the technical firms surrounding it—thanks most recently to the efforts of Frederick Terman. They were also seeing the economic value of those connections—a value that fostered the innovation and commercial growth that came to define 20th century Santa Clara Valley.

Onto this strong and valuable tradition of Stanford-industry relations subsequent university leaders built during the post-Terman era. They began by continuing to encourage private sector technologists to come to campus. In 1964, for example, Stanford convinced an engineer from Shockley Semiconductor to open a new Integrated Circuits Laboratory and help the school incorporate the new technology into the technical curriculum.38 A few years later, the university expanded the “Stanford Industrial Affiliates Program,” which for a modest fee ($10,000 as of the early 1990s) granted companies access to academic labs, research meetings, students and faculty, and special recruiting events. By contrast, the equivalent MIT program, the MIT Industrial Liaison Program, charged

$50,000 for access to only “research findings and educational resources.”39 Moreover, for the new inventions that came out of these joint affiliates programs, the university established a licensing office in 1969, which helped commercialize the new products. MIT, on the other hand, did not start

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something similar until the late 1980s—and even when it did, it was not an easy partner. A software executive in Boston recalled:

It was difficult to work with [the computer science department at MIT]. Every time I went [there] I got sick because they wanted our money but we could never get joint projects going… We had better relationships with Stanford [which was thousands of miles away].40

In addition, as evidence of the university’s interest in building ties with even the smallest tech firms, beginning in 1975 Stanford started hosting the meetings of the Homebrew Computer Club in the university’s Linear Accelerator Center. The club served as a gathering point for fledgling Santa Clara Valley tinkerers and entrepreneurs such as Steve Jobs and Steven Wozniak who wanted to share their latest tech inventions.41 Hence, Stanford continued to bring individuals in technical industries to campus for interaction with faculty and students in the post-Terman era.

The university also continued to send its people out to local firms. Professors, for example, frequently attended research seminars at private firms. Remarked a Xerox executive who attended one such seminar at the company’s Palo Alto Research Center (“PARC”):

The seminar at PARC was held in a large hall, and I noticed that about a third of the audience [was] not wearing Xerox employee badges, although they participated actively in the discussion. I learned afterwards that they were Stanford faculty, who ha[d] an open invitation to all PARC Seminars.42

In contrast, when the same executive attended a seminar at Xerox’s Waltham, MA office, there were “no faculty from MIT or any other university… nor had any evidently been invited.”43 Stanford students also continued to flow into high-tech firms. In addition to countless engineering students populating the established companies such as Xerox, HP, and Oracle, several founders of major new firms got their start at the university. The two creators of Yahoo! in 1995, David Filo and Jerry Yang, were Stanford electrical engineering PhD candidates. Similarly, two Stanford computer science PhD candidates, Larry Page and Sergey Brin, started Google.44 Thus, Stanford faculty and students continued to actively participate in the events of local, private, high-tech enterprise following Terman’s departure from Stanford in the mid-1960s. This further fortified the university’s uniquely strong relationship with industry.

A Unique Geographic Environment

It was not just that Stanford was a different kind of university which helped establish Silicon Valley. It was that Stanford was a different kind of university in a different kind of place. Behind the stage at the 1891 university inauguration was not a bustling Kendall or Harvard Square, or a crowded Upper West Side, or a skyscraper-filled downtown Philadelphia; instead, sun-soaked, open hills shortly gave way to the nation’s western coastline. This particular physical environment of undeveloped mountains in a temperate climate and sandwiched between two bodies of water thousands of miles from the East Coast would play an equally important role in laying the foundations for the 20th century boom of the Santa Clara Valley. It would at once serve as a lower— relative to more densely developed areas—cost place to construct a high-tech cluster and attract a certain type of individual who subscribed to, and hence established, a unique corporate culture. Both were key inputs to the region’s long-term success as a capitol of technological innovation.

The physical environment helped establish the Santa Clara Valley as a region of economic growth by lowering the cost of constructing a high-tech cluster. The undeveloped state of the land in the 19th century was important. For the open tracts of farmland and orange groves lent themselves to large

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landholdings, which facilitated the extraordinarily large, 8,000-acre gift from Leland Stanford to his new university.45 With so much property at its disposal, the university was later able to easily accommodate not only new academic buildings, but also extracurricular land use endeavors such as the Stanford Industrial Park to strengthen its unconventional ties with industry—something its East Coast counterparts could not as effortlessly do. Moreover, the non-built-up state of most of the land within and around the university at the turn of the 20th century made the construction of lecture halls, research labs, and office buildings tailored to the needs of technical enterprise cheaper and easier; all that was needed was the removal of a few crops and trees as opposed to the demolition of old factories or homes.46

Working hand-in-hand with this abundance of undeveloped land in bringing about the subsequent growth of the local technology community was the area’s physical layout. The natural boundaries of the Valley—the San Francisco Bay on the East and the Pacific Ocean on the West— hemmed in Stanford and its surrounding development just enough to ensure that no two establishments would be very far from each other.47 This meant that the constant exchange of people and ideas in technical fields at the university and in nearby industry would not have to travel extensively—a major advantage when complex, engineering problems difficult to describe remotely needed to be solved.48 The mountains in the area served the same function in that they restricted development to certain areas, which further ensured that firms locating in region would be fairly clustered. Hence, the physical layout of the land in the Santa Clara Valley stood as a second environmental feature that would aid the region’s 20th century rise.

A Unique Innovation, Management and Labor Culture

The area also attracted a certain type of individual who subscribed to and hence established a unique corporate culture not common in many East Coast cities. Specifically, the “practical” university coupled with the undeveloped, sun-soaked hills amidst a temperate climate to appeal to men and women interested in technical invention, but not within the structured corridors of colder, Eastern businesses; people who wanted to work on the frontier of technological knowledge, but in a more open, less established, hierarchical corporate setting.

Some of the earliest examples were the ham radio enthusiasts of the 1910s and 1920s. Young men fascinated by short-wave radio forged in the fledgling Bay Area electronics industry a culture of camaraderie, sociability, egalitarianism, and democratic ideology that likely would have faced larger obstacles elsewhere.49 The men not only formed clubs that gave little heed to traditional distinctions of class or education—such as the Santa Clara County Radio Club of the mid-1920s that counted among its members farmers, Stanford students, private-sector engineers, and retired executives—but also openly published their latest innovations in newsletters like the San Francisco based Radio.50 In addition, they helped each other set up small, independent enterprises rather than branch offices of Eastern corporations.51 Charles Litton, for example, after starting his own firm, gave his glass lathe blueprints to Eitel and McCullough when the latter were launching Eimac. Similarly, Ralph Heintz, after co-founding H&K, provided advice to other entrepreneurs so frequently he characterized the electronics industry as one in which, “we learn from each other… I help them and they help us.”52 Through these actions, the cooperative, entrepreneurial, Bay Area ham radio enthusiasts of the early 20th century showed both a passion for technology and a disdain for formalism, bureaucracy, and corporate secrecy. As such, they stood as early examples of the type of corporate non-conformists attracted to the relatively undeveloped commercial environment of the Santa Clara Valley—a place where budding entrepreneurs could write their own professional rules on a cultural canvas far less filled with decades of commercial precedent.

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The primary way this cultural influence manifested itself was in the continued stream of similarly unconventional tech entrepreneurs in the decades immediately following. In 1933, for example, Phil Farnsworth returned to his native San Francisco to establish his own television company after growing tired of wearing a suit to the office each day in the Philadelphia branch of the electronics firm Philco. Farnsworth’s taste for the alternative earned him the title of “maverick from the West” in Philadelphia.53 Once back in San Francisco and at his own firm, Farnsworth no longer had to worry about such rules or ridicules. Similarly, in 1948, Russell and Sigurd Varian, who were raised in a utopian, socialist-theosophist community in central California, chose the Stanford Industrial Park for the site of their firm rather than New Jersey where they had worked during World War II.54 Finally, Ralph Heintz, after spending two years in New Jersey himself at the engineering firm Bendix decided he could no longer endure the “outfit” there and declared: “I’m going home. I’m a Californian. I can’t live in this atmosphere.”55 So common became these entrepreneurial defections from East Coast electronics firms by quirky, unconventional engineers in the mid-20th century that the term “Californiaitus” developed as an oft-heard phrase in technical company research labs throughout the Eastern Seaboard.56 Historian AnnaLee Saxenian described the trend as one in which electronics entrepreneurs ventured west because of “a distrust [of] established, East Coast institutions and attitudes” and a related desire to be out in the more culturally—and physically—open West.57 Hence, the unconventional, collaborative-yet-competitive, entrepreneurial culture of tinkering originally established by the ham radio enthusiasts continued to draw eccentric, commercially-minded engineers to the Santa Clara Valley during the middle part of the 20th century.

This entrepreneurial culture was present in nearly every element of the enterprises that were established—from products, to organizational structure, to compensation, to financing. In products, inventors and entrepreneurs frequently followed their ham radio predecessors by both operating in areas beyond those controlled by East Coast firms and constantly tinkering for the next big invention. Just as the ham radio enthusiasts had chosen a technology largely outside of the Eastern purview (indeed, in 1922 the Department of Commerce considered short waves to be so worthless that it abandoned regulating them) so too did the mid-20th century entrepreneurs.58 These technologies included electronic components, military instruments, and advanced communication devices as opposed to consumer electronics, in which RCA, GE, and Westinghouse held strong market shares.59 So prevalent were specialized electronics components firms in the Santa Clara Valley from 1930-1960 that between 40% and 70% of the region’s broader electronics workforce—a workforce that made up a large share of the total—worked at a components company.60 As Frederick Terman summarized, “out here, [we] focus on specialized stuff to avoid RCA.”61 Hence, in products, the mid-20th century electronics entrepreneurs in the Bay Area built upon the untraditional style of their ham radio predecessors by working in spaces not dominated by Eastern conglomerates.

They also followed ham radio enthusiast suit in terms of products by maintaining a focus on innovation. Just as the first vacuum tube had been developed by tinkerers in the Bay Area in 1912, so too was the first viable, continuous-wave magnetron (a more sophisticated vacuum tube that could jam radar systems)—created by Litton Engineering Laboratories in 1945.62 Not far behind was the 1956 Varian Associates’ VacIon, a vacuum pump that relied on electronic rather than mechanical power and did not require cooling water, both of which eased transport. Government (NASA), university research labs, and private, high-energy R&D facilities all quickly became major customers.63 Finally, three years later in 1959, Fairchild Semiconductor made what many consider the “most important innovation in the history of the semiconductor industry”: the introduction of the planar-based integrated circuit.64 This device, like the Litton and Varian inventions before it, became a springboard for subsequent local innovation and thus helped propel the Santa Clara Valley to the center of the technological world.

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Beyond product selection and innovation, the influence of the unique ham radio enthusiast mentality on mid-century Santa Clara Valley entrepreneurs spilled over into management practices as well. At the broadest level, this meant a democratic and egalitarian ethos within firms as well as a fairly flat hierarchy—much like the mindset and structure of the ham radio clubs. When the Varian brothers established their company in the Stanford Office Park, for example, they chose the name “Varian Associates” to emphasize that their organization would be an “association of equals” rather than a company of “own[ers] and employees.”65 The firm had no elaborate reporting charts with managers at the top and workers at the bottom; instead, each engineer was a part-owner and every employee voted for a group of colleagues who sat on a “Management Advisory Board” which helped senior engineers design firm policy.66 A similarly untraditional, decentralized organizational structure existed down the street at HP. Wedded to the belief that good ideas came from anywhere, Hewlett and Packard pioneered in the 1940s a management style based on teamwork, openness, and participation.67 Senior executives, including the two founders, frequently engaged in project work with new engineers. Moreover, everyone parked in the same lot, dined in the same hall, worked in the same workspace (i.e. no private offices), and dressed in the same casual dress. Managers were taught to “wander around” and strike up informal, unplanned conversations with employees, who themselves were encouraged to pursue their own innovative “pet projects,” which regularly became the next big company rollout.68 “So democratic” were these mid-20th century Santa Clara Valley tech firms and so widespread were their practices in the region, wrote journalist Tom Wolfe, that when “businessmen from the East” visited, they quickly became “startled” at what they saw.69

Yet another management practice which exemplified the unique, regional culture was the innovative, untraditional manner in which workers were compensated. Many Bay Area tech firms were among the first and most ambitious in the conferral of non-monetary, fringe benefits. In 1939, for example, Eimac setup an on-site medical unit and a subsidized cafeteria for its workers— something not commonly seen since the railroad “company towns” of the late 19th century.70 Playing to the fondness for the outdoors exhibited by many of its migrant engineers, Litton went a step further in 1949 by purchasing a large tract of land surrounding Jackson Lake in the High Sierras for employees to use as a vacation spot.71 Even bolder than these fringe benefits, were the monetary payment schemes pioneered at Santa Clara Valley tech firms in the mid-20th century. Profit-sharing and employee ownership became increasingly common, both to retain talent and to stave off growing unionism in the Bay Area. For example, while Eimac was building its on-site medical unit, it was simultaneously initiating a program to share one-third of all firm profits with employees.72 Two years later, Litton and another startup power-tube company of which Charles Litton was also a co-founder (Industrial and Commercial Electronics), boasted profit-sharing fractions of one-half.73 Varian Associates’ made an even greater commitment to employee equality in 1948 when it opened as an entirely employee-owned firm. And Electro Dynamics, a major microwave tube maker in the mid-20th century, embarked into new financial compensation territory on the West Coast when in 1953, upon purchasing Litton, it offered each Litton manager 5,000 stock options to stay with the merged entity.74 Such option pay was not common at the time. These policies came to define “West Coast” management style and would subsequently give way to the elaborate company cafeterias and widespread use of equity compensation seen later in Santa Clara Valley high-tech firms.

Such practices had a profound effect on the labor market by building up employee loyalty. Additionally the regulatory environment created a market consisting of truly free labor. Going back to a landmark decision in 1872 as part of California’s Civil Code, the state provided more rights to labor and denied the rights of corporations to enforce NDAs, non-competes, and other restrictive labor contracts. While this legislation arose accidentally as a consequence of California’s mix of Spanish, Mexican and English legal traditions, it had long-lasting legacy effects. Section 16600 of the California Business and Professions Code mandates that “every contract by which anyone is

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restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” This represented a departure from many other states that permitted corporations to enforce restrictive labor market practices.75

A Unique Approach to Entrepreneurial Finance

Given these unconventional operational, compensation and regulatory factors, it was only natural for Santa Clara Valley tech firms to also use less traditional approaches to finance. The funding vehicle they chose was one consistent with the collaborative, entrepreneurial culture in which they operated: venture capital, a form of finance that often brought technical expertise and industry contacts in addition to monetary support. The VC tradition in the Bay Area started well before venture funding officially launched in 1946 with Georges Doriot’s founding of the American Research and Development Corporation (ARD). FTC, for example, where Frederick Terman had interned and more than twenty subsequent electronics entrepreneurs received their training, was seeded in 1909 with money and know-how from private investors such as Stanford President David Jordan, Stanford Civil Engineering Department Chairman, C.D. Marx, and “Silicon Valley’s first true venture capitalist” according to MIT Professor Timothy Sturgeon, William Crocker, a railroad magnate looking for a return on his transportation largess.76 Crocker in particular proceeded with FTC in true venture capital form by making a second round of investment when the company later wanted to build a new tube manufacturing facility.77 Similarly, Eimac, the ham radio startup, also received its initial $2,500 in 1934 from non-bank sources: two Bay Area businessmen: Walter Preddey, a movie theatre chain owner, and Bradshaw Harris, a San Bruno real estate salesman.78

When the mid-20th century tech entrepreneurs invoked non-bank support for their enterprises a few decades later, they did so using much the same VC-type backing. Once Phil Farnsworth, the San Francisco television tinkerer, needed his initial infusion of cash upon moving back to the West Coast to start his new firm, he located it among the then well-experienced VC-type investor, William Crocker, and a second local businessman, George Everson.79 Similarly, Hewlett and Packard received their initial dollars in 1938 from the non-bank, technically knowledgeable source of Stanford’s engineering department—via Frederick Terman, who directed university investment in many other local, tech startups during his tenure.80 Likewise, the Varian brothers raised the original $120,000 for Varian Associates in 1948 from friends, employees, and nearby investors.81 Finally, in perhaps two of the more famous venture-funded tech endeavors of the mid-20th century Santa Clara Valley— endeavors that would spur not only a string of spinoffs, but also a surge in venture funding as a means of raising cash—Shockley Semiconductor received its seed money in 1955 from a private, California investor, Arnold Beckman, and its most well-known spin-off, Fairchild Semiconductor, was funded by the non-bank, technically-knowledgeable Fairchild Camera and Instrument Company.82 Combined, all of these firms highlighted the extensive VC-type financing activity in the mid-20th century Santa Clara Valley tech sector. This established a foundation for the dramatic expansion of venture backing in the following decades.

Expansion

Significance of Links to the Military

With this collaborative-yet-competitive, entrepreneurial business culture firmly in place among the innovative electronics firms and associations of mid-20th century Santa Clara Valley, all the region needed in order to rise to national economic prominence was greater demand for its specialized, high-tech goods. It got exactly this, in an extraordinary way, from the U.S. military during the World

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War II and Korean War years of 1940-1960. For the dramatic influx of military dollars over that time period provided the financial capital, which then attracted the human capital that allowed existing and new Santa Clara Valley tech firms to expand and innovate. As a result, the Bay Area established itself as one of the premier technology centers in the world.

The military was a natural customer for Santa Clara Valley tech firms even before the spectacular demand it showered on the region in the mid-20th century because of the high-tech, specialized nature of Bay Area electronics firms’ products. As early as World War I, Santa Clara Valley firms were creating and manufacturing goods for the armed forces. FTC created the “Poulsen Arc” long-wave radio for the U.S. Navy—a product that quickly became “the Navy’s darling of the WWI period.”83 Similarly, Magnavox invented a public address system for WWI battleships and anti-noise microphones for Navy flying-boats. For these efforts Magnavox was awarded a medal.84 During the inter-war years, production for military clients continued as H&K employed its cutting-edge radio technology to develop a new airborne radio system for military planes in the 1930s.85 Hence, thanks to their specialized, technical products that were not manufactured elsewhere, Bay Area electronics firms found a natural customer in the U.S. military during the first half of the 20th century.

It was during the WWII and the Korean War years, however, that Department of Defense (“DoD”) demand for Santa Clara Valley tech output reached levels large enough to make the region a center of high-tech manufacturing. Military purchases of microwave tubes, one of the Bay Area’s specialties, soared from a few million dollars in 1940 to $113M by 1959.86 In an even shorter, four-year period also ending in 1959, armed forces transistor acquisitions increased from $1.8M to $99M.87 Through such large increases in purchasing from 1940-1960, the DoD quickly became the largest and often sole consumer of the unique vacuum tubes, microwave tubes, and semiconductors that Santa Clara Valley electronics firms produced. Until 1967, the U.S. military consumed more than half of all integrated circuits produced by Bay Area Firms.88 This dramatic increase in military purchases helped double California’s share of prime military contracts from 13% to 26% in just three years (1951-1953), which catapulted the state into the top spot in terms of total military contract spending—overtaking the previous leader, New York.89

With this influx of federal dollars came an influx of human capital. Employment in the high-tech sector grew to more than 58,000 by 1960 as firms scaled up to meet military production demands.90 In the two counties of San Mateo and Santa Clara alone, employment in electronic components manufacturing climbed from less than 1,000 to 10,000.91 This would eventually make San Jose the densest metropolitan area in the United States in terms of highly skilled manufacturing workers.92

The reason the Bay Area tech sector was able to absorb all of this financial and human capital so quickly and scale up so successfully was its strong cultural foundation, which promoted adaptability and innovation. Innovations made to accommodate military demand were three-fold: process innovations, product innovations, and new firm startups. The process innovations unsurprisingly came first. In 1942, for example, FTC engineers again came to the DoD’s assistance—this time by devising a novel vacuum tube production technique that improved yields from 35% to above 95%. This improvement allowed the firm to scale up production and revenues from $47,000/month to over

$600,000/month.93 From 1941-1944 HP re-tooled its line of electronic measuring devices and receivers to increase output 27 times from $37,000 to $1M while increasing employment by only 11 times from 9 to 100.94 Varian Associates followed suit by raising klystron sales by a factor of one hundred—from

$200,000 to $25M—while only quadrupling its staff size from 1949-1959.95 This sales increase made Varian the largest U.S. manufacturer of microwave tubes—bigger than GE, Raytheon, and RCA.96

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Other Bay Area high-tech incumbents kept their innovation focus trained on products, a strategy which became extremely lucrative thanks to the “cost-plus” military contracts that dominated the era for new devices. “Cost-plus” contracts paid for all production expenses as well as a guaranteed, fixed fee. Litton Engineering Laboratories won several during the period, including a 1950 deal over GE and other East Coast firms to build $2M worth of a new microwave tube—at a time when Litton’s annual revenues were only $600,000.97 Thanks in part to this contract, sales at Litton tripled over the next decade and employment quadrupled.98 Similarly, Eimac invested heavily in developing new vacuum tube technologies for the military. It hired hundreds of engineers who invented novel tubes for airborne radar, aviation, and nuclear resonance. Headcount grew from 20 in 1940 to 2,600 in 1959.99 As a result, sales exploded from $1M to $29M during the two-decade period. Like Varian, Eimac earned the top spot in terms of U.S. production in its overall product category—vacuum tubes—thanks to this DoD increase.100

The third creative way Bay Area entrepreneurs responded to the increased military demand for high-tech products during World War II and the Korean War period was to continue their tradition of starting new firms. In 1944, Alexander Pontiaff, an employee at the wartime-booming San Carlos submarine antenna manufacturer, Dalmo-Victor, procured $25,000 from his boss and Dalmo-Victor owner, Tim Moseley, to start Ampex, a company that would design antennas for military aircraft rather than submarines.101 Pontiaff was so successful that he had to relocate Ampex to a larger facility in less than two years.102 In an equally successful startup, eight Mountain View engineers at Shockley Semiconductor—dubbed the “traitorous eight”—broke away to form Fairchild Semiconductor, which not only serviced a large military contract business but was also seeded by a thriving military contractor on Long Island, the Fairchild Camera and Instrument Company.103 Like Ampex, Fairchild Semiconductor grew its initial business—in Fairchild’s case, semiconductors—using the military’s almost-exclusive demand for its products. Thanks in part to the DoD purchases, Fairchild sales shot from $65,000 in 1958 to $440,000 a year later, to an astonishing $21M by 1960.104 Meanwhile, employment increased from 180 to more than 1,400.105 Hence, with both Ampex and Fairchild Semiconductor, the U.S. military provided not only the initial demand for the company’s output, but also the seed capital (albeit indirectly). In both ways, the DoD acted as a stimulus for high-tech startups in the Bay Area in addition to driving process efficiencies and production innovations at incumbent firms.

Agglomeration Benefits

With the significant increase in the size of the high-tech sector in the Santa Clara Valley from 1940- 1960 came the more general economic benefit of higher productivity that results from large amounts of commercial activity in a single place—a phenomenon economists call “agglomeration.” Agglomeration stems from reductions in the cost of transporting goods, people, and ideas when all three grow concentrated. It often starts when one industry in a local area grows large enough that related firms—competitors, upstream suppliers, and downstream purchasers—choose to also locate in that area to take advantage of being close to the growing industry’s output, workers, and knowledge. In technical sectors like electronics components, the knowledge benefits are often particularly large because having lots of similarly trained and similarly skilled workers in close proximity can lead to learning and idea generation above what would occur if fewer workers were together in the same place.106

The Santa Clara Valley began to realize such agglomeration benefits with the significant increase in the size of its high-tech sector from 1940-1960. This became evident in the actions and comments of post-1960 Bay Area entrepreneurs. Jean Hoerni and Jay Last, for example, both of whom worked at Fairchild Semiconductor, insisted on starting their semiconductor firm, Amelco, in Mountain View

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rather than any other place in order to take advantage of the Bay Area’s “rich labor pool and supply network,” which offered “more engineers, technicians, operators, and suppliers of chemicals and semiconductor processing equipment” than any other place in the world.107 Similarly, Jeffrey Kalb of DEC remarked that after 1960 in the Santa Clara Valley “there’s just about anything you want... It’s not just one thing. It’s labor, it’s materials, it’s access to shops, and it’s [quick response] time.”108 By the 1960s the Bay Area had become an important location, particularly for technology firms.109

Moreover, the nature of the high-tech sector exaggerated the agglomerative process in the Santa Clara Valley. The inherent complexities of high-tech work made proximity to similarly focused firms and workers especially valuable. Communicating complexities—equations, chemistry and physics formulae, intricate drawings of prototype products—is difficult; so the less mediums and distances over which messages have to travel, the greater the likelihood those messages will be understood by the receiving party and processed. Hence, co-locating was exceptionally advantageous for high-tech firms. DEC engineer Tom Furlong of Palo Alto noted as much:

[A]n engineering team simply cannot work with another engineering team that is three thousand miles away, unless the task is incredibly explicit and well defined—which they rarely are. If you’re not tripping over the guy, you’re not working with him, or not working at the level that you optimally could if you co-located.110

Similarly, a tech executive who moved to the Bay Area in the 1980s to be closer to a major customer proclaimed, “I don’t care how well the specifications are written on paper, they are always subject to misinterpretation. The only way to solve this is to have a customer’s engineer right here. There is no good way to do it if you’re more than 50 miles away.”111 Flextronics CEO Robert Todd agreed: “[High-tech] relationships [simply] can’t be built over long distances.”112 Hence, the inherent complexities of the high-tech sector exaggerated the agglomerative process in the mid-20th century Santa Clara Valley.

The Bay Area agglomerative process was further augmented by the collaborative elements of the region’s firmly-engrained, unique, entrepreneurial culture. Knowledge spillovers flourished within and between firms in a firm-connected-to-university environment. Entrepreneurs frequently traveled directly to each other’s labs to exchange ideas. Charles Litton, for example, stopped by Varian Associates’ research facilities in 1951 on many occasions to advise engineers.113 At other times, ideas were exchanged at industry club or trade group meetings such as those of the West Coast Electronics Manufacturers Association, which, established in 1943, looked a lot like the Santa Clara County Radio Club of the 1920s.114 In still other instances the conversations were even less formal, occurring at local watering holes such as the now-well-known—for the very reason that on the backs of its soggy napkins were sketched some of the biggest technological breakthroughs of the mid-20th century— “Wagon Wheel” in Mountain View.115 Novelist Tom Wolfe dubbed this particular bar the “fountainhead of the semiconductor industry” where:

[M]embers of an ‘esoteric fraternity’—the young men and women of the semiconductor industry—would head after work to have a drink and gossip and brag and trade war stories about phase jitters, phantom circuits, bubble memories, pulse trains, bounceless contracts, burst modes, leapfrog tests, p-n junctions, sleeping sickness modes, slow-death episodes, RAMs, NAKs, MOSes, PCMs, PROMs, PROM blowers, PROM blasters, and teramagnitudes, meaning multiples of a million millions.116

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Endurance

“Re-invention” Relative to Route 128

The importance of the area’s distinct, entrepreneurial culture of experimentation, openness, and collaboration-mixed-with-competition became apparent shortly after the mid-20th century military boom when the culture allowed local tech firms to adjust production to non-defense output quickly, particularly relative to the other large, U.S. high-tech cluster: Boston’s Route 128 (Exhibit 3).117 In the early 1960s, Defense Secretary Robert McNamara scaled back military spending on high-tech devices significantly in what became known among technology executives as the “McNamara Depression.” DoD purchases of microwave tubes, for example, fell from $146M in 1962 to $115M in 1964. Similarly, the lucrative cost-plus contracts which had helped build the Santa Clara Valley dropped from 35% to 15% of all contracts from 1960 to 1965. The DoD also increasingly demanded firms share intellectual property with competitors in a practiced called “second-sourcing.”118

Thanks to the Bay Area’s nearly three-quarters-of-a-century-old innovative business culture which welcomed new technologies and change, its high-tech firms were able to respond. As they had when the military largess first appeared, incumbents adapted by altering their product lines. Eimac, for instance, developed a new line of power-grid tubes designed to improve FM radio.119 Litton modified its microwave tube division to produce microwave ovens.120 Varian Associates began producing scientific and medical instrumentation to the point that that the percentage of firm sales to the military dropped from 90 in 1959 to 40 in just eight years.121 Fairchild Semiconductor did likewise by creating more than 130 silicon transistors and integrated circuits for high-speed computers, television monitors, and kitchen appliances by 1964. This compared to the eight transistors and circuits, all of which were made for aircraft and radar systems, the firm produced in the late 1950s.122

Equally important for the Santa Clara Valley’s transition to a commercial customer base was the continued strength of new firm creation, which became especially vibrant when engineers at incumbent firms felt that their employer’s civilian adaptations were not going far enough. When none of the 130 new transistors at Fairchild Semiconductor sufficiently satisfied two of its top engineers—Gordon Moore and Robert Noyce—the men left to start Intel.123 Within three years they invented the first commercially-available microprocessor using silicon-gate technology, which led journalist Don Hoefler to describe the area as, “Silicon Valley” in Electronic News.124 Jerry Sanders III followed Moore and Noyce a year later, leaving Fairchild to launch AMD.125 Over the coming decades, more than 30 Fairchild engineers would depart to form their own, high-tech, commercial- customer-focused companies.126 Many non-Fairchild engineers would join them, bringing the total number of new Santa Clara Valley semiconductor firms to more than 40 by 1976.127 Such a rapid startup rate pushed the segment’s customer base from more than half military in the mid-1960s to a mere 12% by 1972.128 In the high-tech sector as a whole, by the late 1970s, more than 3,000 firms—70% of which employed less than 10 people and 85% of which less than 100—called the Bay Area home.129

By contrast, Boston’s Route 128, did not engage in the same process of reallocation. Incumbents were slower to shift product lines, as evidenced by the inability of Raytheon, one of the regions’ most military-dependent firms in the pre-McNamara Depression with 87% of sales going to the government, to decrease its DoD reliance by the late 1960s when it still sold more than 55% of its output to the military. Nor did a post-1960 startup wave sweep through Route 128 like it had in the Santa Clara Valley. Whereas more than 40 new semiconductor firms were hatched in Northern California from 1959-1976, only five opened in Massachusetts.130 Combined with incumbent firm inertia, this resulted in more than 30,000 high-tech sector job losses in Route 128 during the early

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1970s.131 By the mid-1970s, the relative Route 128 tech recession was so severe that the balance of employment and output had shifted strongly westward.

Building on Early Advantages

It was not product adjustments and startups alone that helped the Santa Clara Valley tech sector survive the military cuts of the 1960s and 1970s, but rather an extension of factors that had led to the initial expansion. One of the first areas beyond products where inventiveness became crucial soon after the military cutbacks was marketing. Bay Area business leaders realized the importance of marketing in the switch from military to civilian goods. A number of firms set up sites in different commercial centers throughout the country where potential customers—corporate and university- based scientists, engineers, and researchers—could tinker with new products alongside a Santa Clara Valley company engineer. Varian Associates’ Pittsburg “Application Laboratory” stood as a prime example.132 Bay Area tech firms also moved aggressively to publish articles in leading academic and industry journals extolling the functionalities of their inventions. Intel co-founder Gordon Moore, for example, explained the many uses of integrated circuits for televisions and telephones in a 1965 Electronics article. In that article Moore also introduced “Moore’s Law”—the idea that the number of transistors on an integrated circuit would double approximately every two years. The piece soon become one of the most widely read high-tech industry trade journal articles ever.133 When opportunities to tinker and the written word were not enough, Santa Clara Valley firms supplemented their information campaigns with seminars which had the same, capabilities-sharing goal. One example was National Semiconductor’s 1968 “IC Seminar” in Los Angeles which promised that attendees would “get smarter, invent better, and be one-up on practically everybody” after learning how to incorporate National Semiconductor’s products into a manufacturing process.134 Finally, in perhaps their most proactive marketing measure, Santa Clara Valley entrepreneurs went physically on-site to customer R&D labs and factories to co-design with customer engineers new products incorporating high-tech components. Fairchild Semiconductor was well known for this as its engineers often went on-site at television manufacturers’ plants to create integrated circuits specifically for televisions.135

Once they had decided on a new product and a novel method to pitch it, Bay Area tech firms then applied their characteristic innovation to a management realm which had also undergone continuous change since it was first identified by the mid-century entrepreneurs as an area for profit enhancement: process improvement. In the 1960s and 1970s, this primarily took the form of moving routinized, manufacturing tasks off-shore where labor costs were significantly lower. Gordon Moore and Robert Noyce (still) of Fairchild led the charge in 1964 when the duo turned an old rubber shoe factory in Hong Kong into an assembly line for one of Fairchild’s less-complicated circuit components.136 Within a year, Moore and Noyce had the plant turning out 120 million transistors at a quarter of the cost of Northern California production.137 On the basis of this success, Fairchild opened a second, similar plant in South Korea a short time later.138 To stay competitive, other high-tech firms in the Santa Clara Valley did the same. National Semiconductor moved fabrication of its more mundane microcircuits to Singapore in the late 1960s and built factories in Bangkok, Thailand, and Indonesia in the 1970s.139

For the growing number of highly-skilled workers whose jobs remained in the Santa Clara Valley during the 1960s and 1970s, a further push toward increasingly flatter organizational structures became another characteristic extension of earlier egalitarian ideals. Fairchild executives, for instance, scheduled regular lunches with randomly selected employees to discuss what was happening on the front lines of the firm’s plants and labs and encourage decision-making as far down the chain of command as possible—just like HP had a few decades earlier. Fairchild also organized company

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sports outings that eschewed firm position.140 Similarly, Intel reserved no parking spaces for its executives, did not have an executive dining room, required no formal dress, and built no executive office suites—everyone worked in a big, shed-like room with desks divided by easy-to-move partitions.141 In this way Intel looked remarkably similar to HP, which since the 1940s had a common parking lot, a single dining hall, and completely open work spaces.142 Intel also—like Fairchild— conducted regular meetings—each Thursday—between top management and arbitrarily selected front-line employees to encourage grass-roots innovation. In addition, the company advocated ad- hoc meetings between staff of different departments and rank.143 Finally, its founders, Robert Noyce and Gordon Moore, echoed two other, earlier Santa Clara Valley egalitarians—Russell and Sigurd Varian—when the two Fairchild defectors expressed a desire for “everyone [at Intel] to feel like he’s in it together,” and for the firm to avoid a “bureaucratic, East Coast” atmosphere.144 As late as 1980, Noyce boasted that only one member of the company’s board had ever worked for a company larger than Intel.145 Outside of Fairchild and Intel, for the more than 2,100 smaller (less than 10 people) Bay Area high-tech firms, which comprised more than 70% of the region’s technology companies in the late 1970s, a hierarchical administration was not only inconsistent with corporate culture, but also impossible since those firms simply were not big enough to have a large bureaucracy.146

Also as in the mid-20th century, these flatter Santa Clara Valley offices were accompanied by even flatter methods of compensation: widely-spread profit-sharing and equity compensation. At its 1957 founding, Fairchild provided nearly its entire senior staff with stock options. (The company attempted to give options to all the engineers but was rebuffed by its East Coast parent who deemed the practice “socialist.”)147 Similarly, Signetics (1961), National Semiconductor (1967), and Intel (1968) also used stock options heavily to attract and retain talent.148 At Intel, everyone was included in the options plan. So prevalent in the Santa Clara Valley by the mid-1970s was the use of equity compensation that a local venture capitalist remarked, “stock is the mother’s milk of Silicon Valley. It’s important to give people equity here. If they don’t have ownership in the company, it just doesn’t work very well.”149 In this way, the flat firm hierarchies brought with them similarly democratic compensation practices. Both remained important in furthering the culture of innovation and collaborative competition that underpinned the region’s economic success.

The Rise of Professional Venture Capital

Perhaps an even more important factor in maintaining and advancing Santa Clara Valley’s innovation edge in the 1960s and 1970s was the growth in venture capital (Exhibit 4). As described above, since the early 20th century, non-bank funding had been an important financing mechanism for Bay Area tech firms, but it was in the 1960s and 1970s that venture capital formalized and dramatically expanded as a local industry. No longer was VC just a few well-heeled, San Francisco businessmen investing in friends’ technical hobbies. Now, it was a whole group of individuals—some from the Bay Area, more from outside who migrated to it—who connected Santa Clara Valley technical entrepreneurs who had ideas to institutions and individuals who had capital.

The first professional venture capital firm in the area was Draper, Gaither & Anderson, established in 1959. One of the founders, William H. Draper, Jr., a prominent investor and diplomat was joined in the endeavor by his son William Draper III, who had attended Harvard Business School where he had taken a class with Georges Doriot, the prominent professor and pioneer of venture capital. One of the firm’s first investments was in Corbin-Farnsworth (no relation to Phil Farnsworth), a Palo Alto company founded in 1960 that became responsible for the first cardiac defibrillator and external pacemaker (Corbin-Farnsworth was subsequently sold to the pharmaceutical firm Smith Kline and French Laboratories.) A few years later Draper III left the Draper, Gaither & Anderson to form, with Franklin Johnson, Draper & Johnson Investment Company under the provisions of the

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1958 Small Business Investment Act, which was designed to create an institutional framework for channeling investment capital into entrepreneurial firms.150 In 1964 Draper III partnered with Paul Wythes to form Sutter Hill Ventures, which had significant but not outstanding investment returns. Draper III remembered “we had a lot of doubles and triples [but] not many strikeouts.”151

Another of the earliest and more successful venture capitalists was Arthur Rock. Just a few years after seeding the “traitorous eight” founders of Fairchild, Rock left his New York investment bank to establish a firm—Davis & Rock—dedicated solely to financing early-stage, high-tech companies.152 Rock and his partner, Thomas J. Davis Jr., himself an investor in Bay Area tech firms since 1957, turned $3 million into $90 million in just seven years by capitalizing what turned out to be some of the most profitable technology firms in the area: Teledyne (1960), Amelco (1961), General Micro Electronics (1963), Intersil (1967), and Intel (1968).153 Unsurprisingly, others quickly followed and by the late 1960s, there were more than 30 venture capital firms in the Santa Clara Valley, and by 1974, more than 150.154 Prominent among the new generation of venture capitalists were individuals with technical or tech-firm experience. Don Valentine, for example, a former senior sales and marketing executive for Fairchild Semiconductor, in 1972 founded the venture capital firm Sequoia Capital. That same year, Eugene Kleiner, one of the “traitorous eight” at Fairchild similarly left the company to co- found a high-tech-focused VC firm, Kleiner Perkins. Mike Markkula, a former Fairchild and Intel Manager who became an angel investor in Apple in 1977, and Robert Noyce, another of the “traitorous eight” and Intel co-founder who became angel investor in Advanced Micro Devices (AMD) in 1969 were two other notable examples.155 Hence, by the end of the 1970s, venture capital in the Santa Clara Valley had gone from an informal network of wealthy, West Coast businessman to a recognized industry of nationally-sourced money spurring growth in the Bay Area’s tech sector.

As in earlier decades, it was no coincidence that VC was the particular form of financing chosen by local high-tech firms. VCs were uniquely designed and cultured to tolerate the uncertain and fast- paced world of their seeded companies. For starters, in their distinct structure and mission, venture capital firms were more willing and able than traditional commercial banks to assume the additional risks of funding unproven tech people and products. The non-asset side of VCs’ balance sheets, for instance, consisted of equity investments from wealthy limited partners—usually institutions or high- net-worth individuals—rather than deposit liabilities of mom-and-pop bank account holders. Hence, the VC firm could make riskier bets since a major decline in its assets’ values—that is, the values of its seeded firms—would be absorbed by the wealthy entities holding equity in the VC rather than small consumers holding a debt-like claim. Moreover, these equity-investing institutions—also known as the limited partners—knew the high-risk, risk-high return proposition VC firms were offering. It was not one of lending at one low rate and borrowing at a lower one—like that of an incorporated commercial bank. Instead, it was the opportunity to get an equity piece of an organization that specialized in seeding relatively unknown people creating unproven products in an environment of rapid change. The upside and downside were both large, and everyone knew that.

The VC firms of the Santa Clara Valley were more equipped than other, outside-the-region VC firms to take on these additional risks of funding unproven tech people and products because Bay Area VCs were animated by the same culture of uncertain entrepreneurialism that permeated local tech firms. The founders of Santa Clara Valley VC firms, for example, were often attracted to the area’s tech sector for the very reason that the sector was so dynamic and rapidly changing. Arthur Rock described his 1961 decision to re-locate from New York to the Valley by proclaiming that in the Valley, he would be able to “invest in [the] exciting [Santa Clara Valley] companies [and] entrepreneurs” instead of the “not exciting” East Coast firms in which far less innovation was occurring.156 Gordon Bell, the vice president of engineering for a major tech firm that operated in both Boston and the Bay Area spoke to the migration of just such Rock-type men to the Santa Clara

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Valley when he noted that “the venture capital community [in Massachusetts] is a bunch of very conservative bankers [who are] radically different from the venture capitalists in Silicon Valley… [In Massachusetts], [u]nless you’ve proven yourself a hundred times over, you’ll never get any money.”157 Thus, because of the uncertain, dynamic nature of the Santa Clara Valley tech sector, the financiers who were attracted to the region in the 1960s and 1970s and then built the modern, local VC industry were men and women that were prepared for—indeed, often seeking—just such an environment of entrepreneurial risk-taking. As a result, Bay Area VC firms were more willing to fund unproven products and people. It was simply the culture of the area.

Along with this increased tolerance for uncertainty Bay Area VCs also exhibited an acceptance of—and perhaps penchant for—the tech world’s fast pace. Within his first year in the Bay Area, Arthur Rock arranged financing for four firms: Amelco, General Capacitor Company, Microwave Electronics Corporation, and Teledyne.158 In another case, a Fairchild executive who wanted to start his own semiconductor equipment and fabrication consulting business was able to find venture funding in just six days. “Startups here [in the Santa Clara Valley] tend to move very fast,” he remarked, “[So a venture capital firm that is willing to do the same] is exactly what’s needed.”159 In yet an even more extreme example, Alan Michals, the founder of Convergent Technologies, claimed he “got commitments for $2.5 million in 20 minutes from three people over lunch who saw me write the business plan on the back of a napkin.”160 Regardless, whether it was six months, six days, or six hours, venture funding typically came fast as Santa Clara Valley VCs showed a willingness to act quickly when a promising opportunity presented itself.161 This was especially important in tech’s rapidly changing environment. For example, in the transistor space that Fairchild entered in 1957 and Intel in 1968, more than 6,000 different transistor types were introduced from 1956-1970. Similarly, in the computer chip arena, the number of circuit components on a chip jumped from 1 to 1,000 from 1959-1970.162 Hence, it was essential for the venture capital firms to act with speed to mitigate the threat of obsolescence. Because of their were willing to do so—both culturally and because many VCs had short investment time horizons of their own—VCs became an increasingly popular financing vehicle in the Bay Area tech sector of the 1960s and 1970s.

Perhaps the most important reason, however, that the Santa Clara Valley venture capital industry blossomed in tandem with the high-tech sector it funded during the 1960s and 1970s was that it continued to bring technical expertise in addition to cash to the fledgling firms it supported. At a minimum, VCs invoked basic laws of governance, actively sharing accumulated high-tech knowledge and helping with business problems. Thomas Davis and Arthur Rock, for example, brought to the companies they funded in 1961 eight years of tech industry familiarity—a large amount relative to other contemporary investors, especially those from the East Coast.163 The duo also attended weekly staff meetings at Intel to assist with operational difficulties starting in 1968.164 Similarly, Eugene Kleiner and Tom Perkins provided their portfolio startups (Applied Materials, Genentech, and Compaq) insights on both the inner workings of transistors (Kleiner, from his days at Fairchild) and large tech firm management (Perkins, from his ten years as HP’s first general manager of the computer divisions).165 Mike Markkula did the same for Steve Jobs and Steve Wozniak with his engineering and marketing know-how gained during his time at Fairchild and then Intel.166 And Robert Noyce shared his experiences of building a sustainable tech enterprise with former Fairchild colleague, Jerry Sanders, when Sanders founded Advanced Micro Devices (AMD) in 1969 with Noyce’s financial support.167 In short, each of these Bay Area VCs acted in the manner historian AnnaLee Saxenian described: “becom[ing] unusually involved in their ventures—advising entrepreneurs on business plans and strategies, helping to find co-investors, recruiting key managers, and serving on boards of directors.”168 Thus, along with financial capital, VCs also brought their young, seeded firms crucial human capital in the form of knowledge sharing and business assistance

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in the Santa Clara Valley in the 1960s and 1970s. This boosted the survival rates of Bay Area startups, and in turn furthered the economic success of the region.169

Beyond their own advice, Santa Clara Valley venture capitalists also provided a second extremely valuable form of human capital to their sponsored entrepreneurs: connections to others in the high- tech industry. This was not only consistent with the collaborative aspects of the Bay Area culture, but also critical to the region maintaining its competitive edge. Davis & Rock linked its companies with other local tech businessmen and businesswomen, as well as academics—much like Fredrick Terman had done with the young firms he assisted a quarter century earlier. At the 1968 founding of Intel, for example, Arthur Rock included five other Fairchild engineers in the investor group, which ensured a ready cadre of technical experts incentivized financially to help the new semiconductor company.170 Similarly, Kleiner Perkins connected all of its portfolio firms with one another and according to one sponsored entrepreneur, “always push[ed] [the firms] to work with or at least talk with other members of the portfolio about business problems.”171 Saxenian went so far as to dub the Santa Clara Valley venture capitalists the “central actors in the region’s social and professional networks” as a result of the VCs extensive efforts connecting their entrepreneurs to anyone the VCs felt could help ensure success.172 Thus, in addition to providing their own advice to the firms they funded, venture capitalists went out of their way to also link their seeded companies to a broad swath of other human capital: related firms, technical academics, and management experts. In doing so, they expanded and strengthened the web of high-tech knowledge in the Santa Clara Valley in the 1960s and 1970s and brought essential expertise as well as investment capital. Such solid intellectual, social and financial support stood as another reason VCs became the unique funding vehicle of choice among Bay Area tech startups during the latter half of the 20th century.

A Flourishing Cluster

Just as economics and culture had allowed the Santa Clara Valley to undergo a process of re- invention during the downturn associated with the 1960s military cutbacks, so too did it foster expansion during the boom times. This became particularly evident during the 1980s when the region continued to post outsized growth in its tech sector. Over the decade, total tech sector employment grew by 30% from just over 200,000 to nearly 260,000 as the Santa Clara Valley became the nation’s largest regional net recipient of highly-skilled workers.173 The metropolitan area of San Jose in particular became the densest metropolitan area in terms of such workers in the country. Meanwhile, tech employment in the most comparable, non-Bay Area high-tech cluster, Boston’s Route 128, grew only half as fast—from 125,000 to 150,000.174 The relative Santa Clara Valley boom was also reflected in differences in the growth in the number of patents in the two areas (Exhibit 1).

Moreover, rising Bay Area tech employment was due in part to another continued positive trend in the region: vibrancy in high-tech startups. During the decade, more than 80 new semiconductor firms were founded, which generated a combined $2 billion in annual sales and expanded at an average annual rate of 50%.175 In addition, also like their 1960s and 1970s startup predecessors, these new firms had high survival rates. Niney percent lasted six years or more—a number much higher than the national average manufacturing startup survival rate of 75%.176 Combined with the employment statistics, this high startup survival rate meant was that by the end of the decade, there were more than 50,000 different firms in the Santa Clara Valley—true agglomeration—up from 2,500 in 1965. Moreover, 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.177 By almost any metric, the Santa Clara Valley had emerged as one of the largest and most prosperous high-tech clusters in the world by the beginning of the 1990s.

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The 1990s and first part of the 21st century then showcased the region’s ability to expand during prosperous times and re-invent itself during downturns. During the booming 1990s the region flourished. In 1992, for example, sales at the 100 largest Santa Clara Valley firms expanded at an annual rate of 15% compared to 4% among the nation’s Fortune 500.178 By 1999, amidst the information and communications technology revolution, Bay Area productivity—as measured by value-added per worker—had grown to nearly 1.5 times that of the U.S. average worker and approximately a third of all U.S. venture capital poured into the region (Exhibit 4).179 When the dot- com bubble burst in the early 2000s, the region picked itself up anew—much like it had in the post- military largess era of the 1960s. Older companies developed new products (iPod, Android, tablets) and new companies sprang up with similarly novel goods. Firms like Facebook and Dropbox, although established on the East Coast, soon re-located to the West Coast area. Overall therefore, the closing of the 20th century and opening of the 21st demonstrated the capacity of the Santa Clara Valley tech sector to deploy its culture and capital toward growth and sustainability in the face of both potential downturns and booms. Such nimbleness ensured that the Bay Area would remain a center of high-tech innovation and economic prosperity.

Conclusion

If Leland Stanford could stand on that same 1891 stage today—more than 120 years later—he would likely wonder at, but also greatly appreciate, the significance of the payoffs from his initial investment. For on, and around, the bucolic acres of orange groves and farmland he donated, the world’s greatest entrepreneurial hotspot had been created, exemplifying just the type of technical business enterprises he so desperately hoped his “practical” graduates would create during their “useful” careers. He would now be viewing a high-tech cluster that had grown faster and for longer than any of its domestic or international rivals and one that would seemingly endure.

Today, high-tech industry in Santa Clara Valley is still growing at a rapid rate, human capital continues to be attracted to the area, and the venture dollars that seed entrepreneurship have been persistent for decades. As such, it is unlikely that Leland Stanford would be concerned about Santa Clara Valley’s economic survival. On the other hand, U.S. regional comparative advantage has always tended to be ephemeral as exemplified by the examples of Lowell, Cleveland, and Detroit. According to the frequently cited aphorism, “history often repeats itself.”

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Exhibit 1 Population and Patents for Selected Years, Silicon Valley and Route 128.

Population
County	1890	2010	% Change
Silicon Valley
Alameda	93,864	1,513,043	1512%
Santa Clara	48,005	1,786,267	3621%
Santa Cruz	19,270	262,880	1264%
San Francisco	298,997	805,340	169%
San Mateo	10,087	719,706	7035%
Total	470,223	5,087,236	982%
Route 128
Essex	299,995	744,484	148%
Middlesex	431,167	1,505,720	249%
Norfolk	118,950	672,107	465%
Suffolk	484,780	722,731	49%
Total	1,334,892	3,645,042	173%
Patents
County	1950	2000	% Change
Silicon Valley
Alameda	382	1,344	252%
Santa Clara	77	5,635	7218%
Santa Cruz	13	460	3438%
San Francisco	214	484	126%
San Mateo	54	1,136	2004%
Total	740	9,059	1124%
Route 128
Essex	1,082	475	-56%
Middlesex	608	2,131	250%
Norfolk	188	450	139%
Suffolk	289	581	101%
Total	2,167	3,637	68%

Source: Compiled by the authors from data in 1890 Census of Population, 2010 County Business Patterns and from tabulations of United States patent records.

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Exhibit 2 Geographic Location of Silicon Valley and Route 128 Counties.

Source: Compiled by the authors using ArcGIS.

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Exhibit 3 The Rise of Silicon Valley and Relative Decline of Route 128.

50

45

40

35

30

( Firms )25

20

15

10

5

0

Before 1950s 1950s 1960s 1970s 1980s

Founding Date

Silicon Valley Route 128

45

40

35

30

( Firms )25

20

15

10

5

0

1985 1986 1987 1988 1989 1990

Silicon Valley Route 128

Source: Compiled by the authors using data in AnnaLee Saxenian, 1994, Regional Advantage. Cambridge: Harvard University Press, p. 108, 109.

Notes: Top figure shows by founding decade (e.g. 1950s, 1960s), the number of high tech firms with over $100M in sales in 1992. Bottom figure shows the number of fast growing high-tech firms.

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Exhibit 4 Venture Capital in Silicon Valley and New England.

45%

40%

( Venture Capital Investments by Value )35%

30%

25%

20%

15%

10%

5%

( 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 )0%

Silicon Valley New England

35%

( Venture Capital Investments by Number of Deals )30%

25%

20%

15%

10%

5%

( 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 )0%

Silicon Valley New England

Source: Compiled by the authors using data in National Venture Capital Association Yearbook, 2011.

Notes: Figures for Silicon Valley and New England are expressed as percentages of total venture capital investment by value and by number of deals in the United States.

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Endnotes

1 “Stanford Facts: The Founding of Stanford,” Stanford University website: http://facts.stanford.edu/founding.html.

2 U.S. Census of Population, 1890, Volume I, Table 5.

3 U.S. Census of Agriculture, 1890, Volume 5, Table 6.

4 Gertrude Stein, 1937, Everybody’s Autobiography. New York: Random House..

5 Naomi R. Lamoreaux, Margaret Levenstein, Kenneth L. Sokoloff, “Financing Invention during the Second Industrial Revolution: Cleveland, Ohio, 1870-1920,” NBER Working Paper, 2004.

6 Edward Glaeser, 2011, Triumph of the City: How our Greatest Invention makes us Richer, Smarter, Greener, Healthier, and Happier. New York: Penguin Press, p. 30.

7 “Stanford Facts: The Founding of Stanford.”

8 Stanford Electrical Engineering Department History: http://ee.stanford.edu/history.php.

9 Stanford Electrical Engineering Department History.

10 Stanford Electrical Engineering Department History.

11 As a prime example of the Bay Area’s revolving door between academia and industry—and a foreshadower of the rise of Silicon Valley entrepreneurialism—Herrold went on to found the Herrold College of Engineering and Wireless in San Jose where he trained more than one thousand wireless operators during WWI See, Timothy Sturgeon, 2000. “How Silicon Valley Came To Be” in ed. Martin Kenney’s Understanding Silicon Valley, Understanding an Entrepreneurial Region. Palo Alto. Stanford University Press, p. 3-4.

12 Sturgeon, “How Silicon Valley Came To Be,” p. 19.

13 FTC used Poulsen arc transmitter technology to transmit speech messages up to ten miles and telegraph signals up to 180 miles. The technology was originally invented by Dr. Vladimir Poulsen of Denmark in 1900. Cyril Elwell negotiated with Poulsen in 1908 to acquire the U.S. patent rights to the technology, which Elwell then brought to FTC in 1909 [Sturgeon, “How Silicon Valley Came To Be,”, p. 6-7]. Also emblematic of the revolving door between academia and industry in the Bay Area technical fields, Fuller went on to chair the Electrical Engineering Department at the University of California at . See, Glaeser, Triumph of the City, p. 30; Sturgeon, “How Silicon Valley Came To Be,” p. 6; 15; Carolyn Tajnai, 1985. “Fred Terman, the Father of Silicon Valley.” Stanford Computer Forum. Stanford., p. 10.

14 Sturgeon, “How Silicon Valley Came To Be,” p. 6-7.

15 Sturgeon, “How Silicon Valley Came To Be,” p. 9

16 Sturgeon, “How Silicon Valley Came To Be,” p. 27; Christophe Lecuyer, 2006. Making Silicon Valley: Innovation and the Growth of High Tech, 1930-1970. Cambridge, MA: MIT Press, p. 22, 32

17 Sturgeon, “How Silicon Valley Came To Be,” p. 27; Lecuyer, Making Silicon Valley, p. 22, 32

18 Lecuyer, Making Silicon Valley, p. 55.

19 Lecuyer, Making Silicon Valley, p. 55, 293.

20 Tajnai, “Fred Terman, the Father of Silicon Valley,” p. 10.

21 AnnaLee Saxenian, 1994, Regional Advantage. Cambridge: Harvard University Press. p. 22; Peter Hall. 1990. “The Bay Area in the twenty-first century: shall we survive?” Berkeley: University of California at Berkeley Working Paper 501, p. 9.

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22 William Hewlett and David Packard were among the first in 1938 [Sturgeon, “How Silicon Valley Came To Be,” p. 39]

23 Lecuyer, Making Silicon Valley, p. 49.

24 Lecuyer, Making Silicon Valley, p. 49, 50.

25 Lecuyer, Making Silicon Valley, p. 138.

26 Sturgeon, “How Silicon Valley Came To Be,” p. 26, 31, 55; Saxenian, Regional Advantage, p. 138.

27 Saxenian, Regional Advantage, p. 8, 12

28 Saxenian, Regional Advantage, p. 15. 29 Lecuyer, Making Silicon Valley, p. 49. 30 Lecuyer, Making Silicon Valley, p. 57.

31 Saxenian, Regional Advantage, p. 23-24.

32 Stanford Center for Professional Development website: http://scpd.stanford.edu/aboutUs/aboutUs.jsp

33 Saxenian, Regional Advantage, p. 23.

34 Saxenian, Regional Advantage, p. 66.

35 Saxenian, Regional Advantage, p. 23.

36 Lecuyer, Making Silicon Valley, p. 125.

37 Udayan Gupta. 2000. “Done Deals: Venture Capitalists Tell their Story—Featured HBS, Arthur Rock.” Harvard Business School Working Knowledge for Business Leaders Archive.

38 Lecuyer, Making Silicon Valley, p. 250.

39 Saxenian, Regional Advantage, p. 66.

40 Saxenian, Regional Advantage, p. 66, 67.

41 Walter Isaacson, 2011, Steve Jobs. New York: Simon and Shuster, p. 61.

42 Saxenian, Regional Advantage, p. 67.

43 Saxenian, Regional Advantage, p. 67.

44 Glaeser, Triumph of the City, p. 32.

45 By comparison, Harvard University’s main campus is 210 acres and MIT’s is 168 acres.

46 Glaeser, Triumph of the City, p. 31.

47 Saxenian, Regional Advantage, p. 30

48 Saxenian, Regional Advantage, p. 30; Glaeser, Triumph of the City, p. 32.

49 Litton, Eitel, and McCullough all came from families in the Bay Area that had strong histories of technical tinkering and entrepreneurship. See, Lecuyer, Making Silicon Valley, p. 14.

50 Lecuyer, Making Silicon Valley, p. 16, 17.

51 Lecuyer, Making Silicon Valley, p. 38.

52 Lecuyer, Making Silicon Valley, p. 26, 33; Sturgeon, “How Silicon Valley Came To Be,” p. 26.

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53 Sturgeon, “How Silicon Valley Came To Be,” p. 26.

54 Lecuyer, Making Silicon Valley, p. 97.

55 Sturgeon, “How Silicon Valley Came To Be,” p. 29.

56 Lecuyer, Making Silicon Valley, p. 97.

57 Saxenian, Regional Advantage, p. 30, 70, 81.

58 Lecuyer, Making Silicon Valley, p. 18.

59 Sturgeon, “How Silicon Valley Came To Be,” p. 17.

60 Lecuyer, Making Silicon Valley, p. 3.

61 Sturgeon, “How Silicon Valley Came To Be,” p. 17.

62 Glaeser, Triumph of the City, p. 31; Lecuyer, Making Silicon Valley, p. 71.

63 Lecuyer, Making Silicon Valley, p. 182, 185.

64 Lecuyer, Making Silicon Valley, p. 130, 150, 155; Glaeser, Triumph of the City, p. 32.

65 Lecuyer, Making Silicon Valley, p. 98. 66 Lecuyer, Making Silicon Valley, p. 114. 67 Saxenian, Regional Advantage, p. 50-51.

68 Saxenian, Regional Advantage, p. 50.

69 Saxenian, Regional Advantage, p. 28. 70 Lecuyer, Making Silicon Valley, p. 41. 71 Lecuyer, Making Silicon Valley, p. 82. 72 Lecuyer, Making Silicon Valley, p. 41.

73 Lecuyer, Making Silicon Valley, p. 42-43.

74 Lecuyer, Making Silicon Valley, p. 85.

75 Maryann P. Feldman, Lauren Lanahan and Jennifer M. Miller “Inadvertent Infrastructure and Regional Entrepreneurial Policy” pp. 217-218 in M. Fritsch, ed., Handbook of Research on Entrepreneurship and Regional Development (Edward Elgar Publishing, 2011).

76 Sturgeon, “How Silicon Valley Came To Be,” p. 6-7, 15.

77 Sturgeon, “How Silicon Valley Came To Be,” p. 18.

78 Lecuyer, Making Silicon Valley, p. 32.

79 Sturgeon, “How Silicon Valley Came To Be,” p. 24.

80 Saxenian, Regional Advantage, p. 7, 27.

81 Lecuyer, Making Silicon Valley, p. 101.

82 Lecuyer, Making Silicon Valley, p. 132, 137.

83 Sturgeon, “How Silicon Valley Came To Be,” p. 6, 8.

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84 Sturgeon, “How Silicon Valley Came To Be,” p. 20. 85 Sturgeon, “How Silicon Valley Came To Be,” p. 29. 86 Lecuyer, Making Silicon Valley, p. 172.

87 Lecuyer, Making Silicon Valley, p. 172.

88 Stuart Leslie, 2000, “The Biggest ‘Angel’ Of Them All: The Military and the Making of Silicon Valley,” in Understanding Silicon Valley: the Anatomy of an Entrepreneurial Region, ed. Kenney, Martin. Stanford: Stanford University Press, p. 1.

89 Leslie, “The Biggest ‘Angel’ Of Them All,” p. 55.

90 Lecuyer, Making Silicon Valley, p. 295. 91 Lecuyer, Making Silicon Valley, p. 6. 92 Saxenian, Regional Advantage, p. 117. 93 Lecuyer, Making Silicon Valley, p. 63.

94 Leslie, “The Biggest ‘Angel’ Of Them All,” p. 53.

95 Lecuyer, Making Silicon Valley, p. 92. Leslie (2000), p. 55-56.

96 Lecuyer, Making Silicon Valley, p. 92; Leslie (2000), p. 55-56.

97 Sturgeon, “How Silicon Valley Came To Be,” p. 20.

98 Leslie, “The Biggest ‘Angel’ Of Them All,” p. 56.

99 Sturgeon, “How Silicon Valley Came To Be,” p. 20. 100 Sturgeon, “How Silicon Valley Came To Be,” p. 33. 101 Sturgeon, “How Silicon Valley Came To Be,” p. 36. 102 Sturgeon, “How Silicon Valley Came To Be,” p. 36. 103 Lecuyer, Making Silicon Valley, p. 130.

104 Lecuyer, Making Silicon Valley, p. 149, 162.

105 Lecuyer, Making Silicon Valley, p. 162.

106 Examples of the agglomeration that began in earnest in the Santa Clara Valley from 1940-1960 include the 1940s growth of vacuum tube manufacturing, which attracted tube suppliers and downstream tube firms. Together, these firms helped spur the subsequent 1950s growth of microwave tube manufacturing in the area. See, Lecuyer, Making Silicon Valley, p.9, 80, 88-89.

107 Lecuyer, Making Silicon Valley, p. 216.

108 Saxenian, Regional Advantage, p. x. Kalb’s company, DEC, produced a study highlighting the strength of the Santa Clara Valley’s innovative human capital network saying: “The [Santa Clara Valley] possesses a special kind of infrastructure that has in effect institutionalized innovation in technical fields across the board. [It] is unrivaled in [the] sheer variety of companies and level of formal and informal networking among companies in technical fields… It is this cross-cutting strength—an economic infrastructure comprising strong technology, human resource, capital inputs, and numerous industrial synergies—that make Northern California a magnet for top engineering talent, innovative startups, and major breakthroughs in technical fields across the board.”

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109 Executives in the integrated circuits subsector remarked that it was easier to launch an integrated circuits firm in the 1960s in Santa Clara Valley than in the 1950s because so many suppliers (e.g. diffusion ovens, epitaxial reactors, step and repeat cameras) had setup there by the 1960s. See Lecuyer, Making Silicon Valley, p. 124, 258. This was in spite of higher factor costs. That is, the gains in productivity outweighed higher factor prices. See Saxenian, Regional Advantage, p. 156.

110 Saxenian, Regional Advantage, p. 157.

111 Saxenian, Regional Advantage, p. 157.

112 Saxenian, Regional Advantage, p. 153.

113 Lecuyer, Making Silicon Valley, p. 98, 112.

114 Saxenian, Regional Advantage, p. 21. 115 Lecuyer, Making Silicon Valley, p. 301. 116 Saxenian, Regional Advantage, p. 33.

117 Route 128 was the largest technology cluster as measured by total employment in the high-tech sector.

See, Saxenian, Regional Advantage, p. 3.

118 Lecuyer, Making Silicon Valley, p. 171-172, 283.

119 Lecuyer, Making Silicon Valley, p. 46-47.

120 Lecuyer, Making Silicon Valley, p. 81.

121 Lecuyer, Making Silicon Valley, p. 11, 192.

122 Lecuyer, Making Silicon Valley, p. 8-11, 197.

123 Saxenian, Regional Advantage, p. 112

124 Saxenian (1004), p. 112; Lecuyer, Making Silicon Valley, p. 253.

125 Saxenian, Regional Advantage, p. 38.

126 Saxenian, Regional Advantage, p. 38.

127 Saxenian, Regional Advantage, p. 70.

128 Saxenian, Regional Advantage, p. 26, 70.

129 Saxenian, Regional Advantage, p. 44.

130 Saxenian, Regional Advantage, p. 70.

131 Saxenian, Regional Advantage, p. 14.

132 Varian Associates, for example, setup two such “Applications Laboratories”—one in Palo Alto and the second in Pittsburg to show potential customers the capabilities of the firm’s nuclear magnetic resonance (“NMR”) spectrometer, which analyzed chemical compounds. Apparently their efforts were successful as by 1964, 18% of all papers published in U.S. chemical journals relied on results obtained from NMR spectroscopic techniques. See, Lecuyer, Making Silicon Valley, p. 189-191.

133 Lecuyer, Making Silicon Valley, p. 245, 11. A second example were Varian Associates’ publication of 65 articles on NMR methods and applications to chemistry in leading chemistry journals in the late 1950s. See, Lecuyer, Making Silicon Valley, p. 189.

134 Lecuyer, Making Silicon Valley, p. 271.

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135 National Semiconductor was also particularly well known for such practices. See Lecuyer, Making Silicon Valley, p. 271.

136 Lecuyer, Making Silicon Valley, p. 170.

137 For example, engineers in Hong Kong worked for $150/month versus Mountain View engineers who required up to $600/month. See Lecuyer, Making Silicon Valley, p. 205.

138 Lecuyer, Making Silicon Valley, p. 207.

139 Lecuyer, Making Silicon Valley, p. 272, 291; Saxenian, Regional Advantage, p. 93.

140 Lecuyer, Making Silicon Valley, p. 163.

141 Saxenian, Regional Advantage, p. 52-54.

142 HP continued such practices into the 1960s and 1970s. For example, the firm sponsored a first-rate cafeteria, intramural sports teams, Friday “beer busts,” and a park for employees and their families in the Santa Cruz mountains. See, Saxenian, Regional Advantage, p. 51.

143 Saxenian, Regional Advantage, p. 52-54.

144 Saxenian, Regional Advantage, p. 56.

145 Saxenian, Regional Advantage, p. 71. Conveniently, Intel was organically assisted in achieving this goal by the simple fact that in their rapidly changing environment of technological innovation, the structure and sizes of departments changed so frequently that by the time an internal job ladder had been mapped out, it was often obsolete. See, Saxenian, Regional Advantage, p. 56.

146 Saxenian, Regional Advantage, p. 44.

147 Lecuyer, Making Silicon Valley, p. 164.

148 Lecuyer, Making Silicon Valley, p. 265, 279.

149 Saxenian, Regional Advantage, p. 53.

150 Under the Small Business Investment Act (SBA), privately owned investment companies (SBICs) such as Draper & Johnson Investment Company were established and licensed by a division of the Small Business Administration (SBA) and chartered by individual U.S. states. SBICs had to have at least $300,000 of paid-in capital and surplus, up to 50% of which could be supplied by the SBA. SBICs could then leverage at a ratio of 4:1 against privately raised capital and they were also subjected to advantageous tax incentives especially with respect to deferred taxation and the treatment of losses. Small businesses were defined as those that were owned and operated independently and did not dominate their areas of activity (generally fewer than 500 employees). A 5 year minimum loan term was imposed. A primary objective was for SBICs to act as venture capital firms, financing high-growth enterprises.

151 Harvard Business School, “Entrepreneurs: Interview with Bill Draper.”

152 Rock’s partner was a Bay Area businessman, Thomas Davis, who himself also had a history of investing in high-tech West Coast companies such as the tube-maker Watkins-Johnson. See, Lecuyer, Making Silicon Valley, p. 166, 212, 214.

153 Lecuyer, Making Silicon Valley, p. 166, 167, 215, 216, 262, 264.

154 Lecuyer, Making Silicon Valley, p. 264; Saxenian, Regional Advantage, p. 27.

155 Lecuyer, Making Silicon Valley, p. 167; Isaacson, Steve Jobs, p. 77.

156 Gupta, “Done Deals.

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157 Saxenian, Regional Advantage, p. 65.

158 Lecuyer, Making Silicon Valley, p. 166, 216.

159 Saxenian, Regional Advantage, p. 38.

160 Saxenian, Regional Advantage, p. 65.

161 Saxenian, Regional Advantage, p. 38.

162 Saxenian, Regional Advantage, p. 80.

163 Rock had worked with semiconductor firms since his 1957 linking of Fairchild Semiconductor with funding, and Davis had an equal amount of experience with the added benefit of it being on the West Coast.

164 Lecuyer, Making Silicon Valley, p. 262. 165 Lecuyer, Making Silicon Valley, p. 167. 166 Isaacson, Steve Jobs, p. 320.

167 Lecuyer, Making Silicon Valley, p. 262.

168 Saxenian, Regional Advantage, p. 39.

169 Saxenian, Regional Advantage, p. 9.

170 Lecuyer, Making Silicon Valley, p. 262.

171 Saxenian, Regional Advantage, p. 115.

172 Saxenian, Regional Advantage, p. 39-40.

173 Saxenian, Regional Advantage, p. 117.

174 Saxenian, Regional Advantage, p. 3.

175 Saxenian, Regional Advantage, p. 1.

176 AnnaLee Saxenian, 1989, Regional Networks and the Resurgence of Silicon Valley. Institute of Urban and Regional Development, University of California at Berkeley, p. 9.

177 Saxenian, Regional Advantage, p. 106-107, 125.

178 Chong-Moon Lee, William Miller, Marguerite Hancock, and Henry Rowen. 2000. “The Silicon Valley Habitat,” in eds. Chong-Moon Lee , William Miller, Marguerite Hancock, and Henry Rowen The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship,. Stanford: Stanford University Press, p. 2.

179 Lee et. al., “The Silicon Valley Habitat,” p. 2.

31