Accelerating Pace of Change

Why is Silicon Valley so important? Why does it continue to prosper?

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The beginning

Silicon Valley located in the hilly northern part of California, one of the warmer climates in the United States is a treasure on many levels.   Within a few hours drive from the Valley and San Francisco to the west is spectacular rocky James Bond type coastline, full of marine treasures and cute beach towns like Carmel and Aptos, to the east is Yosemite Valley and the tall Sierra mountains surrounding Lake Tahoe similar to Geneva Switzerland.  To the north is wine country and hundreds of the best wines and restaurants in the world, a gustatory pleasure trove and to the south 95% of the garlic, artichokes and many varieties of plants grown in the US.

This is not a travelogue of why Silicon Valley is a great place to live.  Something else happened in SV 50 years ago that changed the world that doesn’t have to do with its natural advantages. Close to 50 years ago legend has it an engineering company started here that somehow changed everything.    It is not a name many have probably heard.  Fairchild Semiconductor was not an especially good company.  It had its merits but it had competitors that beat it regularly and people left Fairchild.  Maybe, because of its mediocrity engineers took flight and tried their own thing.   I just looked up Fairchild and I am shocked to see it is still in the Valley!  It still exists but it no longer ranks even in the top 100 of SV companies.  Nevertheless it is good to see the old geezer is still in there.

The growth of semiconductors and the business of chips allowed small companies to emerge and compete.  This was a business of IP not factories and scale at the time.  So, hundreds of little companies formed.  Silicon Valley developed its own culture of business.   It was far enough away from NYC and the easts traditions, business schools like Harvard and mega companies like IBM that a different way of doing things emerged.  The engineers and people who started companies weren’t steeped in traditional business culture.   They invented a business culture from what made sense to them.

The culture of Silicon Valley emerged quickly.  It was an engineering culture.  Ideas were recognized as paramount achievements.   Silicon Valley evolved a culture based on the mindset and culture of engineers.  Engineers love engineering. They worked not because of money as much as for the love of the ideas and the building and doing.  This is a culture that is earnest and hard working.  Think of hobbyists, think of geeks unconcerned how they look and more concerned with the ideas in their heads.   VCs found that if they gave somebody money they would pour their hearts and souls into it and would work crazily for its success.

The culture was meritocratic but also more egalitarian than the East of the US.   Everybody participated in the success or failure. Secretaries got stock just like engineers.  Rules about distribution of stock became De rigueur:  CEO’s got X%, CTO Y%, VCs Z% and secretaries, line workers, everybody.  Everybody knew that the incentives had to be aligned so everybody felt it was fair.   This worked.  Company after company got funded, worked hard, succeeded and everybody succeeded.  Even if you were a secretary or a line worker you could participate in the American dream.

East Coast vs West Coast Business

I moved to SV after school at MIT.  So, I grew up in the east and I was familiar with the big companies in the east.  IBM, Prime computer, Digital Equipment Corp and numerous other companies run by legendary leaders who transformed technology and dominated the industry.  Silicon Valley was an outpost.   It was nothing special.   I came for the weather more than anything.

The east coast had the older mentality.  Employees got a salary.  Only the few owned the company.  East coast business focused on a few big companies that succeeded wildly but people were loyal to the firms, dependent on them and the salaries they wouldn’t venture as easily to startups.    You joined mostly larger firms and you got paid a salary.

I recently worked for an east coast firm, Bridgewater Associates, one of the largest hedge funds in the world and the largest Macro hedge fund.   Ray Dalio, the leader railed at us “Why don’t you act like owners?”   He said this numerous times.  Ray had a strong belief he knew best how to run a company and how to think.    However, he, like almost all east coast large successful firms had kept a firm lock on the stock of the company.  I understood at the time Ray owned 97% of the stock of the company.  There was a fake stock that a few high level execs owned but Ray owned the firm through and through.   So, when he asked “Why don’t you act like owners?” over and over it was incredibly hard for me not to yell back:  “Ray, maybe it’s because we aren’t owners?”   He paid us generous salaries.  We had bonus’s but we weren’t owners.   We were the cattle he owned and paid to arrive every morning not owners.

Egalitarianism and Respect to Everyone

Silicon Valley developed a different culture.  It wasn’t composed of a few high level “shakers” that owned everything.  Silicon Valley developed an egalitarian loyalty and hard work culture that was centered on the small company and the new guy with an idea, not the old guy who had the idea and made billions but the new guy who deserved to have a chance to succeed.   Unfortunately in the beginning it was a very male dominated culture although I knew many women who succeeded.  I’ll leave it to a woman to expound on this aspect of culture but I don’t think the valley was especially discriminating to women.  I think this is a general cultural problem.

The VCs contributed to the culture by enshrining many of the lessons learned in the Silicon Valley into the processes of how you did business.   They became like the traffic cops making sure everybody followed the rules.

So many companies got started and sold or went IPO that people became serial entrepreneurs.  You never knew what person you met on the street might be making the next Intel or Cisco.   You didn’t care if someone wore a suit because “suits” were for people who sold things not the movers and shakers who had the ideas and the knowledge to do things.  You wore a suit because you didn’t know stuff and weren’t a shaker.   If you were a genius starting the next company you were concerned with working and getting things done not selling your image or some product.

A fairness emerged that said if you screwed this guy he might come back with a company some day and blow you out of the water or more importantly you may miss the opportunity to invest or partner with them.  Best to be friends with everyone.  Don’t make enemies.  You treated everyone with respect and gave people the benefit of the doubt because you never knew down the road where your paths would cross and you would want to work at their company or be acquired by their company.   The valley was small and sooner or later everyone did business with each other again in a new company, a new business.

The Valley enshrined the creative people who made the valley work.  Berkeley and Stanford as well as many schools prospered by becoming engines producing the raw talent but Silicon Valley drew talent from everywhere in the world.   It is said that there is a larger MIT alumni community in the Valley than in the Boston area.  I am proud to say that at one point when TIBCO was worth $20 billion Vivek, my partner at the company was worth > $1B.   How many countries in the world let a guy come in, a foreigner from a third world country with 10 cents in his pocket, attend its best universities and become a billionaire?  How many?  I’m pretty sure the answer is ONE.   In 2000 there were 11 billionaires that were foreign in the valley who made it here.   The valley didn’t care where you came from, who your parents were, who you knew.  It was unique and amazing.

The valley prospered and many tried to replicate it’s success thinking the success was simply a matter of VC’s.  All you needed was to fund companies and you could create a new Silicon Valley.  I don’t think other countries, other places really understood the depth of the SV culture and certainly were not ready to embrace it in its full extent.  They still aren’t.   This is a unique place.

Silicon Valley Today

You see today that Silicon Valley has continued to exceed expectations.  Through every transformation of technology the valley emerges after each shakeup and change stronger.   There have been many times when the Valley faced enormous challenges from foreign countries, technology changes and financial disruption.   Each time the Valley grew stronger and competitors grew weaker or failed.

What started as chip manufacturing area in the 80s became a software powerhouse by the 90s.  Soon after that biotechnology made a huge appearance.  Genetics and high tech pharmaceuticals were close.  After that networking, the internet and the cloud led a massive increase in everything to do with communications technologies.

Over the last 10 years weve seen an explosion of retail firms such as Ebay, consumer electronics with Apple and now an explosion of firms in every conceivable business.  Uber for taxi services, Square, Paypal and others for payments, Tesla in car manufacturing and with the growth of IoT we are seeing an amazing array of watches, clothing technology, robotic technology, artificial intelligence, camera companies, fashion businesses, women’s cosmetics, even blood testing with Theranos.   The valley is exploding into every business segment even areas considered non-tech.  It is also retaining and expanding its dominance of software and computer hardware.

The Future of Silicon Valley

One of the most important transitions going on in manufacturing is the necessity to work with robots more and more.  Over the last 20 years China specifically more than other countries gained because of a low cost manufacturing work force.   However, new robotics technologies, 3D printing technology is changing the face of manufacturing.   Part of the reason is miniaturization but we also in the case of Tesla it is a matter of quality and precision.   A robot can weld a joint to millimeters accuracy.  Humans can’t.   Parts for devices of all sorts are becoming practically microscopic making robotic assembly required.  Parts are being customized to each customer requiring 3D printing.     The robots are coming from Japan and Germany mostly but the manufacturing can be anywhere even the Valley like in the old days of chip manufacturing.  Silicon Valley may be returning to manufacturing.

The other recent and growing trend is to “Network Effect” which means leveraging multiple devices, multiple cloud services to create new value.  Companies such as Uber and Lyft are doing this causing massive disruption.   Why Silicon Valley is becoming a center of such diverse and completely un-technology businesses is astonishing but the trend is clear.    The Valley is becoming the center of many more types of businesses.

The Valley has become validation

When I came to the valley it wasn’t known as the place “to be” or that you had to come here.  You didn’t need to be enshrined by the valley to be successful or taken notice but today it has emerged that even if you can start a company someplace else you frequently find yourself having to have a presence in Silicon Valley.  People have come to believe that virtually every idea worth looking at or investing is here, that the smartest people live in Silicon Valley so you HAVE TO have a presence.

I don’t subscribe to that theory at all but there are reasons people believe it.   I believe the Valley is unique in culture and that there are a ton of incredibly smart people here.  These people are also fickle and expensive.  The Valley has to be one of the most expensive places in the world to hire people.  They aren’t as loyal as people you might hire in Indianapolis or Austin.    Outsourcing has become normal for almost every firm in the Valley.   However, if you are starting a company you will be able to find phenomenal people with every skill imaginable overnight and succeed.

Another reason people come to the Valley is for smart money.   You have to come here to have SV investors give you money because that is better than anyone else’s money.  It is smart money, money that means your idea is worth looking at.   So, the Valley continues to grow in importance to the US and the world economy as it has become the place you look for legitimacy and recognition.

 Conclusion

Silicon Valley embraces change like no other culture in the world.   While I talk of egalitarianism and fairness I don’t use those terms in the political sense of equal sharing of wealth ala socialism.  Silicon Valley is the embodiment of the capitalistic spirit with stock ownership and capital a critical resource, however, it is done with a more traditional idea of liberty in giving people the freedom to explore their future and possibilities.  Silicon Valley more than any other place on earth truly allows you to not only have liberty to express yourself anyway you want but to be supported and to succeed more than anyplace else on earth.

Recently, I have talked to people about the homeless population of the Valley.   There are famous people walking the streets homeless in the valley in cities such as Menlo Park and Palo Alto.   Some people who created companies, some who have patents and were millionaires and may be millionaires today.  One story talks of someone who’s family has taken control of his wealth because he lost his mind.  People frequently know some of these homeless people and have stories.  They will notice if they aren’t around.  So, the bay area is not perfect and there are poor people.

The lesson I want to get out from this article is simple.

People keep talking about replicating Silicon Valley.   To replicate Silicon Valley success it is NOT about creating a nice physical environment or luring people with high salaries.  It is not about putting large venture funds together and funding a bunch of companies.   It is not about technology even.

Silicon Valley is successful because of its culture.  A culture of more meritocracy and egalitarianism than most people understand.  It is about shared power and shared ownership, working together to achieve common goals.  It is about cherishing ideas and giving everybody a fighting chance.   It is about second chances and third chances.   It is about treating everyone as if they were potentially your future boss.

There are lots of exceptions and there is lots of failure.  There are successful companies all over the world, not just the Valley.   The culture of the Valley continues to grow in importance and I think you should know the real SV I know.

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