How It Really Works

What transformed a patch of prune orchards into the epicenter of global technology?

WHO COULD HAVE DREAMED, 40 YEARS AGO, THAT THE EIGHT disgruntled engineers who marched out of Shockley Semiconductor Labs in Mountain View, Calif., would set in motion one of the most amazing chains of events in American business history? They would come to be known as the Traitorous Eight, young men with an average age under 30, each with his genius barely tapped. Among them were visionaries such as Robert N. Noyce, Gordon E. Moore, and Eugene Kleiner. They quickly founded Fairchild Semiconductor Corp., a pioneer in creating semiconductor chips from silicon alone. More important, they began an entrepreneurial tradition that planted the seeds that became Silicon Valley.

Look at what they've wrought. Noyce and Moore went on to found mighty chipmaker Intel Corp., which led to at least eight more spin-offs, and Kleiner helped stoke the Valley's money machine when he launched the region's premier venture-capital firm, Kleiner Perkins Caufield & Byers. Today, there are some 7,000 electronics and software companies and thousands of startups here, with 11 companies being created every week--all crammed into a 50-mile-long corridor, like transistors on a powerful chip.

The combined effect is electrifying. For the past four years, the Information Revolution has driven the U.S. economy and touched lives around the world. While enhancing efficiency even as companies slim down, the mere production of computers and semiconductors accounted for 45% of U.S. industrial growth. And nowhere is that engine humming louder than in Silicon Valley, where 20% of the world's 100 biggest electronics and software companies have taken root. Indeed, the $450 billion market value of the publicly held tech companies in and around the Valley is approaching that of the entire French stock market.

The resulting wealth is staggering. Last year, on average, a Valley company went public every five days, minting 62 new millionaires every day. Wages grew 5.1%--five times the national average. And now, T-shirted tycoons are plunking down cash for million-dollar homes in exclusive enclaves such as Saratoga and Los Altos Hills. Says L. John Doerr, a partner at Kleiner: "This is the largest single creation of wealth and economic activity to be seen in a compressed period of time."

This may not be the Industrial Revolution, but in this technology-blessed realm, the much-lauded postindustrial society is a reality. Here you can reap wealth from sheer brainpower, with most of the manufacturing and assembly done elsewhere. True, the median home price in June hit $319,000, out of reach for 70% of Valley residents. Yet such concerns haven't slowed the influx of entrepreneurs from around the world.

How did Silicon Valley reach this zenith? What transformed a former patch of apricot and prune orchards into the epicenter of global technology? And how does this fearless embrace of innovation really work? Over the past two months, BUSINESS WEEK's staff has augmented years of Valley coverage with more than 300 interviews with movers and shakers, behind-the-scenes power brokers, and the rank and file to scope out what makes the Valley tick.

What we found was a huge brain trust, companies galore to service the tech machine, and a daredevil, risk-taking culture. To be sure, the universities in the region have been a powerful contributor. In particular, Stanford University professor Frederick E. Terman set the tone in the 1930s by fostering entrepreneurship and technical excellence. His legacy is a rich one. He encouraged two of his students, William Hewlett and David Packard, to turn their idea for an audio oscillator into a company. What followed was not just the birth of a powerhouse but a series of Hewlett-Packard Co. progeny that populated the region with new technologies.

This process has built a critical mass in the Valley, where the ability to transform a concept into a company has reached an art form. The tech infrastructure includes everything from venture capitalists to custom chip designers. "There are a lot of people in Silicon Valley who can put companies together for you in an afternoon," boasts Steven P. Jobs, co-founder of Apple Computer Inc. and NeXT Software Inc..

That's just part of the formula. A big chunk of the equation is the Valley's culture--that component that's usually discounted as too squishy to quantify. In this case, it has put an indelible risk-taking stamp on the way the Valley operates. Combine that with the paranoia, born out of the bust years of 1985-86, when computer-industry woes wiped out jobs and some began calling it the Valley of Death, and the result is a hypercompetitive environment where seven-day workweeks have turned companies into 24-hour communities.


The Valley has its flaws. Not only is it expensive and overcrowded but the frenetic pace leaves little time for relationships and family. And, despite the Gold Rush atmosphere and a claimed meritocracy where all that counts is smarts and hard work, there are few women running companies and wielding influence.

Still, businesses around the globe can find lessons here: Take risks, then create an environment for incubating ideas. Add speed. Add supercompetitiveness. And never rest on your laurels. The Valley has much to celebrate. So, on its big 40th, we offer a look at a place where amazing things happen.

Before it's here, it's on the Bloomberg Terminal.