The history of Silicon Valley and the Venture Capital industry

Looking at the history of Silicon Valley is one way to better understand why it outperformed other technology hubs and remained for decades the world’s dominant center for innovation and technology startup ventures.

Silicon Valley is a unique place not only for its groundbreaking technological expertise and entrepreneurial engine that have generated the highest levels of economic growth in the United States but above all for its complex network of innovation (Ferrary, Granovetter, 2009) that helped build it. Within this network, the interaction with VC firms provided a crucial source of robustness that fueled the development of the most noteworthy high-tech startups.

The Venture Capital industry and Silicon Valley are closely connected and interdependent, with the former contributing immensely to the tech hub’s progressive aggregation of its innovative conglomerate. The presence of Venture Capital firms was the catalyst that transformed Silicon Valley into what it is today. At the same time, VC firms don’t have value on their own; instead, their value derives from specific interactions within networks of visionary entrepreneurs, universities, and high-growth companies (Ferrary, Granovetter, 2009). And Santa Clara Valley’s then-rising tech hub provided the perfect environment for monumental innovation.

The role Venture Capital plays in the evolution of Silicon Valley

According to the Global Entrepreneurship Institute, venture-oriented investment management models can be traced back to 19th century France. When this modern banking concept arrived in New York City after the turbulent Civil War, Jay Cooke, the American Credit Mobilier, and later J.P. Morgan established “the most successful entrepreneurial banks” of the time.

The VC industry has been a major source of influence on the development of cutting-edge technology and infrastructure in the United States since the mid-twentieth century. 

Venture-oriented investors helped fund and support various types of new technologies and innovations received financial support throughout history. But it was only when this new investment enterprise arrived in Silicon Valley that the industry matured.

How did Silicon Valley originate?

In 1971, journalist Don Hoefler gave Silicon Valley its famous name. However, by that time, the innovation dynamics that established the region as the world center of technology were already in motion. The specific event that marks the beginnings of Silicon Valley remains unclear. Some field experts date the early days of the tech hub back as far as the establishment of Stanford University in 1891, while others consider 1939, the year William Hewlett and Dave Packard founded Hewlett-Packard in Palo Alto, the planting of the tech seed. Others still argue it was the Shockley (1956) and Fairchild Semiconductor (1957) business feud that sprang the creation of several new tech companies and venture funds (such as Kleiner Perkins). By the 1980s, companies like Intel, Atari, Apple, and Oracle, among many others, grounded Silicon Valley’s worldwide status as the epicenter of the computer industry.

The unique characteristic of Silicon Valley’s powerful, innovative community

A closer look at these points in history shows that Silicon Valley is the result of a gradual aggregation of independent and complementary factors (Ferrary, Granovetter, 2009) over the past half-century, rather than being established at one particular time in the past. Consequently, this unique confluence of factors formed an intricate system favorable to innovation and collaboration. In their 2009 article, authors Michel Ferrary and Mark Granovetter explain the durability of Silicon Valley’s unparalleled capacity for innovation to the presence of and interaction between at least twelve agents: “universities, large firms, research laboratories, VC firms, law firms, investment banks, commercial banks, certified public accountants (CPA), consulting groups, recruitment agencies, public relation agencies and media” (Ferrary, Granovetter, 2009). A myriad of different connections can form between these agents, fostering the creation and growth of successful tech startups.

Venture Capital firms fueled innovation in Silicon Valley and cemented the tech hub as the world’s dominant center of high-tech startups.

Moreover, in his 2019 comparison between Silicon Valley and Route 128, Brian Manning suggests several other characteristics that played an important role in Silicon Valley’s success over the Massachusetts-based tech hub. As Manning rightly points out, people working in the Valley embraced risk, fearlessly started companies, and moved from job to job. They formed a community around their work based on collaboration with other companies and universities. Each of the independent actors present in the region supported Silicon Valley’s growth. As opposed to more traditional industrial conglomerates dependent on government contracts, tech startups in Silicon Valley received financial support primarily from Venture Capital investors. With VC firms fueling innovation, Silicon Valley became the cradle of the most remarkable breakthroughs in technology and nurtured the development of so many outstanding companies.

The decline of VC fundings in Silicon Valley

Although 2021 was overall a record year for VC investment, venture firm Revolution and PitchBook reveal that “capital is increasingly flowing to companies based outside of the Bay Area.” After a decade of declining venture capital investments, Silicon Valley and the Bay Area startups received short of 30% of U.S. Venture Capital investments in 2021, reaching the lowest percentage in the last ten years. Today, an increasing number of VC firms are relocating to other cities across the country. The migration trend is set to accelerate as remote working and the Bay Area exodus enable startups to headquarter and scale anywhere, building on the back of a distributed talent pool.

Furthermore, the report reveals that companies located in Washington, D.C., Phoenix, and Nashville are attracting the most interest and investment opportunities. However, this leaves us wondering: as the Bay Area will likely continue to lose share of U.S. venture capital investment, are we looking at a shift from the Valley to the next great tech hubs around the country? Or the beginning of a new era of tech investment and innovation?