How Silicon Valley Maintains its Competitive Edge

Like Detroit with automobiles or Pittsburgh with steel, Silicon Valley is synonymous with technology. In her new book The Code: Silicon Valley and the Remaking of America, Margaret O’Mara casts a historian’s eye on the contradictions of this pivotal place in modern American history.

Although it is known as a hotbed of entrepreneurship, O’Mara shows the important role played in Silicon Valley by government spending, funneled through research universities such as Stanford or dispensed as federal contracts to tech firms. She charts how the Valley continually remakes itself, creating cutting-edge industry after industry—from semiconductor chips and personal computers to biotech, mobile devices, the Internet, and social media. She traces it from its birth in the military buildup of the 1940s and the Cold War, to the rise of entrepreneurs steeped in the Bay Area counter-culture of the 1960s and 1970s, to now, and the backlash against tech.

O’Mara, who is the Howard & Frances Keller Professor of History at the University of Washington, spoke with me recently about the book. Our conversation has been edited for length, clarity, and flow.

Let’s start at the very beginning: How did Silicon Valley come to be?

The real turning point for Silicon Valley was World War II and the Cold War. If you go back to the 1920s, it’s the Santa Clara Valley, an agricultural valley in California best known for being the nation’s capital of prune production. During World War II and subsequently, this tsunami of military-related government spending starts washing over the Pacific Coast, directly investing in technology and science. It was part of the military industrial complex.

The thing that set the flywheel in motion is big government. It wasn’t a matter of the president saying, “We shall build a science city in northern California,” which many world leaders subsequently have declared. It was a great wave of government spending that was done through universities like Stanford and Berkeley and through private industry and defense contractors like Lockheed.

You write: “The whole enterprise rested on a foundation of massive government investment … from space-age defense contracts to university research grants to public schools and roads and tax regimes.” It’s not just big government, but big government coupled with this incredible entrepreneurial engine and universities.

There are certain things that only government can do. It’s investing in blue-sky research, not just in military, Pentagon spending. It’s also the space race—NASA. Up and down the Pacific West, you find these defense hubs, [like] Seattle and L.A. in aerospace.

The Valley specialized in small electronics for the military and for the space race. Fairchild Semiconductor is the granddaddy of venture-backed startups; a lot of its business came from government contracts, from NASA for microchip technology. When the government buys things, it enables the scaling up of production and drives the price down for the private sector. So, government became an instigator of the market.

How important are universities generally to the high-tech industry, and Stanford in particular to Silicon Valley?

What people tend to overlook is the distinctiveness of Stanford. First of all, its ability as a private university to completely remake itself and to do away with certain departments—in ways a public university cannot or should not do—and [second,] its incredible, fiercely entrepreneurial approach from the 1950s. The attitude that, “We are going to partner with industry, and we’re going to build labs that train exactly the type of people you need.” That’s not necessarily something that every higher-education institution wants to aspire toward, but it is a key part.

Frederick Terman is the dean who built up Stanford’s engineering program in the 1950s. He grew up in Palo Alto, the son of a Stanford faculty member. He went to MIT for graduate school, and worked with the architects of Cold War science and tech policy. He writes to a colleague in the 1940s and says: We have a moment where Stanford could become a consequential world-class university like Harvard or MIT.

What about venture capital?

Early venture capital in the Valley is a wonderful example of how the old economy and new economy became intertwined. Its modern incarnation is created by people like Georges Doriot at the Harvard Business School—a professor who partners with a bunch of Boston Brahmin bankers in the ’40s to capitalize funds that are going to invest in these young, scientific companies that are kind of coming out of this university-based research. Its Silicon Valley iteration kickstarts from younger men who are managing old family money. And it is also helped by the government, in the form of the Small Business Investment Corporation, the strange little creation that comes out of the Small Business Act of 1958. It becomes an extremely generous vehicle.

Then there are the networks of friends helping one another out and allowing one another to tap into these sources of capital. One of the original Silicon Valley venture capitalists, Reid Dennis, indicated to me that in the early days it was effectively like shooting fish in barrel, there were just so many opportunities.

So, many of the venture capitalists came from successful companies, and shifted from being entrepreneurs and technologists to investors?

This establishes a pattern that continues to this day. They are starting to pick the winners of the next generation and also bring their management expertise to that next generation. This is critical to understanding the regeneration of Silicon Valley, its ability to shift from technology to technology. But it also helps understand a blind spot—the narrowness of vision in terms of what are the goals of a company, what makes a good tech entrepreneur, what should a founder look like. These blind spots have become a great liability for the Valley in recent years.

The central theory in AnnaLee Saxenian’s book Regional Advantage is that Silicon Valley is different than older industrial regions like Pittsburgh and Detroit. Those regions got locked into a certain technology and industry, and couldn’t grow beyond it. Whereas the Valley is quite unique in that it leapfrogs from technology to technology.

These different generations of tech may seem separate from one another, but they build on one another. You have the microchip, which gets the microprocessor, and the computer chip, which then makes the personal computer possible. The Valley feels like it’s being eaten alive by Microsoft up in Seattle, but just in the nick of time comes the internet. The internet again plays to the Valley’s strengths and what it has been doing since the very beginning: building very small electronics and communications devices. Those core competencies are really at the core of all of these successive generations of technology.

[The Valley is] far removed from the capitals of finance and politics. I refer to it as an “entrepreneurial Galapagos”—this intergenerational network of venture capitalists, law firms, investment firms, marketing firms.

You point out that the Valley evolved alongside popular culture more generally, from the clean-cut military types of the 1950s to the hippies and counterculture types of the 1960s and 1970s.

The first generation is very much crew-cut, white shirt, and narrow ties; they’re not particularly interested in formal politics. The next generation is counterculture, with a caveat. They’re part of the anti-war protests at Berkeley and Stanford. They want to affect social change, with computers being the tool. Once everyone had a computer, we’re going to rectify all the injustices.

This intense techno-optimism links all of the generations together. They share this belief that technology will be a means by which we make the world a better place. The politics and the messiness of social activism is orthogonal to what they’re trying to do. What we’re discovering now is that these technological tools have served to exacerbate some of the social divisions that their creators wanted to erase.

Seattle has generated some of the biggest and most important tech firms—Microsoft and Amazon, not to mention Boeing. Where does it fit as a high-tech center?

Seattle has always been more of a big-company town than the Valley, in terms of the succession of an economy dominated and defined by a single industry or company: Boeing, then Microsoft, and now Amazon. The engineering capacity of Boeing continues to be a big factor in the economy. Seattle is also home to large outposts of every large technology company and to lot of smaller and midsize startups. Roughly a quarter of those startups were founded by Microsoft alums. Seattle’s tech ecosystem is younger than the Valley’s. But there have long been interconnections between the Valley and Seattle. Some of Microsoft’s earliest venture investments came from Silicon Valley. Amazon also got a good chunk of its early money from Silicon Valley. Jeff Bezos in turn personally put an early stake in Google.

One of the things we’ve been tracking is the shift of high tech from suburban nerdistans to urban centers like San Francisco and New York. What does this say about Silicon Valley?

My first book [Cities of Knowledge, published by Princeton University Press in 2005] was all about high tech in the suburbs. It’s been quite a trip to see what’s happened in the last couple of decades. It’s a phenomenon that partially sociological and partially technological.

[There is] the broader return to the city: The city is the place for affluent young people who can live anywhere they want. In the 1960s, part of the attraction for the engineers was buying a nice ranch house in Palo Alto and Menlo Park. And that’s not what a 25-year-old wants to do now. That’s part of the urban comeback and the rise of these really vital, exciting urban neighborhoods. Companies that need to recruit and retain the best talent; it is an advantage if you have a cool space in a cool neighborhood in a cool city.

But the other thing that’s really interesting to me is how starting a startup is different than it was in 1999 or 2000. Back then, you had to rent out space in an office park and fill it with cubicles and a server room. There was all this upfront capital cost. You could never get commercial real estate of scale in a place like New York City. Now, you can get your computing power and store your data in the cloud. Your startup can be a high-powered laptop and a coffee shop in Brooklyn and you can grow into a WeWork space. Now you can afford to be in a cool neighborhood in New York or San Francisco, or Seattle, because your footprint is smaller.

What does this mean for other cities?

Geography is never static. Detroit was the most innovative city in the world in the 1910s and ’20s. No region’s glory days last forever. When I talk to people who are in their 20s and 30s, there’s a lot of questioning about the dominance of the biggest tech companies. And I think they’re also concerned about quality of life: Do I want to be surrendering my life to this?

This isn’t everybody; there’s still plenty of people who are flocking to Silicon Valley. But I think there’s airspace for the “rest” in a way that perhaps there wasn’t a few decades ago, just because of the way that tech has grown as an industry. This may all change when up-and-coming tech hubs deflate from these really high-priced housing markets. And there will be a bust someday: This is a roller coaster of an industry.

For most of my life, techno-optimism dominated. Now there’s a backlash. It’s happened very quickly.

When I started work on this book five years ago, everyone, from Silicon Valley to D.C., was unironically talking about how tech was changing the world. And now the mood has shifted so dramatically. It’s so gloomy that I find myself kind of protesting: “We have super-computers in our pockets. Let’s appreciate some of the good things.”

The reality is somewhere in the middle. We shouldn’t be Silicon Valley cheerleaders, nor should we tear it all down. And so too in these cities. Are people going to stop wanting to live in San Francisco or Seattle? I don’t think so. They’re nice places; they offer things that many other places cannot and that’s not going to just vaporize. How do you find some balance?

Part of the allure of a city like San Francisco does come from its funkiness, the people who aren’t part of that super-affluent tech world. How do you preserve that? How do you keep the texture and keep the things that make cities so great? I think it’s great that tech is in these cities, quite frankly, from a density and sustainability perspective. Let’s think about how to open it up and also coexist.

San Francisco and Seattle have chronic conditions that have worsened. They already had big transportation problems. They had serious housing affordability problems. And now this rapid-fire growth of tech has made all those problems worse. But it isn’t that tech made those problems happen in the first place.

If the HQ2 search accomplished anything, it crystallized the backlash against tech and this questioning of how much are we—“we” as in local governments—going to do to try and lure these companies, and is it good to have them there? The answer is somewhere between billion-dollar tax breaks and “stay off my lawn.”

The answer is to find some way to work together and to move forward. Tech companies, especially large ones, need to recognize their civic responsibility. It’s kind of easy to say, “Bill Gates should just give a billion dollars to fix this or that.” But governments are going to need to tax people and corporations. After decades of austerity, it’s no surprise that a very unequal and unbalanced system is the result.

There isn’t a lot of diversity in Silicon Valley in terms of gender or race. Is that endemic, or are there any signs it may be changing?

It is endemic, and it also is changing. Back in the ’50s and ’60s, a lot of the people who were seminal figures and investors went to Harvard Business School, but women weren’t admitted back then. Women also were not allowed to major in chemistry or engineering.

[There is] the tightly networked nature of the business—people hired people they knew. The intense work-hard-play-hard ethic has been a hallmark of Silicon Valley tech from the very beginning. They’re going drinking after work together. It becomes a very male-dominated world. Layer over that this incredibly competitive atmosphere of unvarnished criticism.

It’s no surprise that the women who endured were few and far between. A lot of them just say, “I’m not going to put up with this BS,” and then they move on. The 1960s Mad Men era of corporate America got trapped in amber.

But I do see things changing, and here’s why. Because if the winners of the last generation are picking the winners of the next generation, we now have an increasing number of women. They now have resources and are networked together; they’re creating their own version of the group. Yes, that can have its own biases and exclusion. But I am heartened by the fact that the Valley is talking about diversity or the lack thereof in tech in the last several years in a way that it had never talked about it before.

The whole notion of tech being a meritocracy has gotten somewhat battered, as it should, because it’s not a meritocracy. Tech has become more and more the province of upper-middle-class people from upper-middle-class backgrounds who were able not only to get into an elite program at Stanford or MIT, but also to bootstrap a startup because maybe their parents are helping subsidize it. We don’t talk about that enough when we celebrate entrepreneurs. That’s not to say you shouldn’t celebrate entrepreneurship and encourage people to take their innovative dreams and make them a reality. But you have to recognize that not everyone can do that easily. What are the ways that a society can help encourage and recognize where bias exists?

Does the rapid rise of tech centers in China, Europe, and elsewhere represent a threat to America’s preeminence in tech?

The thing that has been really integral to Silicon Valley’s success has been American immigration policy. The 1965 immigration reform that opens the doors to this incredible wave of new Americans, including people who come to the Valley and start founding companies in disproportionately significant numbers. The free movement of people and capital is what the United States has done better than any other place. It’s why all those “Silicon Somethings” across the world haven’t quite attained what the original did.

That is not to say that the U.S. rules, and everyone else is out of it. Silicon Valley is a global network. We are part of a global tech economy. Part of what makes the American tech economy so vital is the fact that it is connected to markets and to technologists and to tech hubs all over the world. To close doors and say, “We’re number one and we’re not interested in what anyone else has to offer,” is really self-sabotaging.