How Did Silicon Valley Become Silicon Valley?

A journalist, Don Hoefler, coined the term “Silicon Valley” in a 1971 article about computer chip companies in the San Francisco Bay Area. At that time, the region was home to many prominent chip businesses, such as Intel. All of these companies used silicon to manufacture their chips and were located in a farming valley south of the city. Silicon Valley is now the most famous technology hub in the world, but it was a very different place before these businesses developed.

When the computer chip industry was emerging in the mid-1950s, the Bay Area was far behind cities like Boston and New York in the chip industry. No one expected the region to become a hub for these technology companies. Silicon Valley’s rapid development offers good news to other cities and regions. While it is impossible to replicate the exact events that established this region more than 50 years ago, the development of Silicon Valley can provide insights to leaders in communities across the world.

Nigeria’s innovation ecosystem has grown rapidly in the past two decades. From long-standing firms like the digital payments processing company, Interswitch, to rapidly growing startups like the logistics platform, Kobo360, technology entrepreneurs in Nigeria have proven that their ideas can scale beyond Nigeria. However, creating a productive ecosystem requires more than innovative ideas. Silicon Valley’s history illustrates important lessons for leaders seeking to cultivate high-growth companies and industries in their own communities.

Endeavor Insight, Endeavor’s research arm, has conducted research on successful entrepreneurship communities in cities across the Americas, Europe, the Middle East, Africa, and Asia. We have observed a pattern in these cities, in which successful entrepreneurs commit to reinvesting their resources into new generations of growing companies. This research is closely related to Endeavor’s work to support fast-growing entrepreneurs in more than 37 markets globally, including Nigeria.

KEY LESSONS

Lesson 1: Great companies can develop in unlikely and challenging places.

In the late 1940s, a team of physicists at an AT&T research centre in New Jersey created the transistor, a new “semiconductor” device that could control and amplify electric signals. The transistor quickly began to replace other signal processing technologies. It became so important that its three inventors were awarded the Nobel Prize. In 1955, one of these inventors, an MIT-trained scientist named William Shockley, decided to start a company that produced transistors. In 1956, he started his new business in Mountain View, a small town in a farming valley 50 miles south of San Francisco.

The San Francisco Bay Area was a very difficult place for the first computer chip entrepreneurs, it lacked the funding and research needed to establish transistor companies. The region was six years behind major cities such as Boston and New York in the development of computer chip companies. It was also difficult to find talented employees since engineers with semiconductor expertise were concentrated in cities that already had transistor companies. Although Shockley eventually hired a great team, the company faced major challenges and management issues before it could pursue customers. After just one year, eight employees resigned on the same day.

In 1957, these eight employees went on to launch a successful chip company in the Bay Area, Fairchild Semiconductor, with help from two key supporters who provided funding and connections to early customers like IBM. In 1959, The co-founders signed a contract to supply components to the new Minuteman missile program. By 1960 Fairchild recorded sales of $21 million and was the eighth largest player in its industry, and in 1966 the company ranked second in its industry and employed over 4,000 people.

Lesson 2: A few entrepreneurs can make a big impact.

When Fairchild Semiconductor won its first contract in 1958, it was the only company in the area producing computer chips or their components. However, the expansion of the local computer chip industry began when Fairchild employees were inspired by the eight co-founders and left the firm to launch “spin-off” businesses. In turn, the co-founders committed their time to supporting many of these ambitious new businesses. Ultimately, the eight co-founders of Fairchild spawned 31 spinoff companies in just 12 years.

By that time, Hoefler had written the article that coined the area “Silicon Valley”. In fact, according to Hoefler’s analysis, every local chip firm, except for two, could be traced directly back to the eight co-founders. This pattern has continued up until today. Nearly 70% of Silicon Valley’s public firms are linked to Fairchild. These 94 firms employ 800,000 people and have a combined value of over $2.8 trillion.

Lesson 3: There is a framework for success that leaders can accelerate.

The Fairchild co-founders fostered the growth of Silicon Valley by following the four steps of the Entrepreneurship Acceleration Cycle: ambition, growth, commitment, and reinvestment. The illustration shows each of these steps and the sub-components it includes.

Step One: Ambition. High-growth industries need ambitious entrepreneurs who seek to build scalable companies because of the local quality of life and a desire to grow. The entrepreneurs responsible for Fairchild lived in the Bay Area and chose to stay, in part because of its high quality of life.

Step Two: Growth. In order to achieve significant growth, firms must have access to talent, financing, and customers.

Step Three: Commitment. Founders must have the desire to stay in their local area and share their resources with the next generation of entrepreneurs. The co-founders at Fairchild demonstrated this when they chose to support other aspiring businesses.

Step Four: Reinvestment. Creators of successful companies reinvest in other entrepreneurs and businesses. Looking backwards in time, it is easy to see how critical this process was to the development of the Valley. The leaders at Fairchild demonstrated the different ways this can happen. They inspired employees to start new companies, the co-founders acted as early investors for the first venture capital firm in the Bay Area, and they also mentored other local computer chip entrepreneurs. These actions helped a new generation of ambitious companies emerge out of Fairchild’s success to create the original “Silicon Valley” and foster future successes in the local community.

This article first appeared in BusinessDay and summarises the report ‘How Did Silicon Valley Become Silicon Valley?’ by Endeavor Insight. Read the full report here.

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Endeavor is leading the global high-impact entrepreneurship movement. We are accelerating the growth of Nigeria’s high-impact, scaleup & growth-stage companies.

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