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What made Silicon Valley special (and where might be next)

Margaret O'Mara comes on the Source Code Podcast.

Margaret O'Mara

Silicon Valley's history is both a top-down and bottom-up story, and the next tech centers will be the same.

Photo: Jim Garner

It seems like just about everyone in Silicon Valley is thinking about leaving, talking about leaving or has actually left this year, and the number one destination is, predictably, Austin. Elon Musk announced his relocation in his usual grand fashion, HPE and Oracle relocated their headquarters there, and loads of tech workers have also made the move.

Amid all this talk about whether Silicon Valley is "over," Margaret O'Mara is probably the person most-suited to pick out the signal from all the noise about the future of the place and the ethos. She's a historian at the University of Washington who researches the history of technology development in the United States, and her most recent research took her to the beginnings of Silicon Valley. Her book, "The Code: Silicon Valley and the Remaking of America" explains how Silicon Valley became the tech capital of the world.

So she came on the Source Code podcast to walk us through how the fortuitous combination of geography, government spending, ambition and networks created the Silicon Valley we know today, and what the region can learn from its past. She explained why Austin seems to be winning the race for the next tech capital, and why many of the tech-focused cities of the future could be outside of the United States.

The following excerpts from our interview have been lightly edited for length and clarity.

Anna Kramer: Let's start with the beginning of your book, which talks about the formation of Silicon Valley. What are the big takeaways that people really need to know to understand how Silicon Valley came to be as unique and possibly irreplicable as it is now?

If you dial back 100 years, Silicon Valley was just another agricultural valley in California. At that time in American history, there were little clusters of entrepreneurial startup activity going on everywhere. It wasn't like this was an extraordinary place. But what happens during World War II and after is that there's this tsunami of military spending that comes in the westward direction into the Bay Area, and particularly, takes these kind of core competencies, these things that are growing, this specialization in small electronics and communication devices, and suddenly creates a patron, a kind of sponsor of research in the form of the federal government, and a big customer in a huge demand for very sophisticated military equipment, not just during the war, but especially after the war. And by the 1950s, there is a small but mighty concentration of electrical engineering going on in the valley, even while the big computer companies, IBM, et cetera, were all on the East Coast.

David Pierce: There was very much a story of two coasts, where you had Boston on one coast and Silicon Valley on the other coast warring to be the center of these things. And then even more specifically, Harvard and Stanford, which had two different ways of thinking about things. And it feels like what Stanford decided to be, instead of what Harvard decided to be, wound up being really instructive in all of this. Can you explain the difference between the two approaches?

I talk a lot about Boston in this book, even though it's a book about Silicon Valley. And we often frame the whole Silicon Valley story as a race with Boston, a steel-cage death match. And actually, what really happened was this symbiotic relationship of people and ideas and firms kind of bopping back and forth between the coasts and usually going from Boston to the Bay Area. And then once they kind of get some sunshine in February, they're like, "Oh, I'm not leaving."

Stanford does play a really distinctive role, and it is unlike any other university. Stanford comes into this period as good but not great, but wanting to be great. And a guy who's really at the center of this whole story is someone I write about quite a bit in the book, named Fred Terman, who's born and raised in Palo Alto. He becomes provost, the chief academic officer of Stanford during the '50s to '60s period, and persuades the other leaders of Stanford that the way Stanford is going to reach the big time and truly become the Harvard of the West is to not be like Harvard, but to really focus on building up its scientific capacity, particularly around the types of things that the Cold War military industrial complex was looking for.

AK: Can you unpack the things that make Silicon Valley utterly unique? If you had to prioritize for yourself, what's the list of the things that are really special and seen nowhere else?

It is a real estate story. You had these developers going in and offering big money to guys who had orchards. Stanford is another key ingredient, I think, the institution and the people made it this magnet. Something else that gets lost in the noise is that not only did the Valley have this concentration of engineering talent, but you also had these specialized service firms that grow. Law firms like Wilson Sonsini, which started off as this small-town law firm that grew to be this whole empire that's focused on a very narrow, important band of industry. You have marketing firms and PR firms that are specializing in consumer-focused tech.

This shows you that the success of Silicon Valley is not just engineers, but it's also people with other skill sets, and also brings in other people that may not be as famous as the ones we all know about. There are women in Silicon Valley's history throughout.

DP: Is that kind of stuff only obvious in retrospect? The tech industry is trying to figure out where these things are happening again, and what's the next place. Could someone have theoretically walked into a store in Palo Alto 50 years ago and sensed the magic in the air?

I think people in it at the time understood that there was something distinctive. And Silicon Valley tends to oversell its rebel image — parts of the secret of success are some business fundamentals. Apple was successful among the personal computer companies because it had smart management. But all that being said, the culture was just willing to be more open to different ideas. Part of that was out of necessity. This was a place that was so far off to the side of the main action for so long. It became very hard for outsiders to see and understand what was going on.

AK: So then, if we think about all these things that you're pointing out that made Silicon Valley so special, are those things possible to replicate at all? And should we be trying to replicate it?

There is a really useful and essential handbook if you are thinking about building a new tech region. Part of it is by learning what Silicon Valley didn't do, where it's failed. Building a huge industrial capital on top of a little string of postwar suburbs turns out to not be a very good way to create a healthy, sustainable, equitable housing market. In a way, it's a disadvantage that the Valley didn't grow in a city. Now you have the double bind of a lot of young, talented people who prefer to live in San Francisco as opposed to Mountain View. And as you grow large, there's a reason that you have infrastructure and a certain degree of density. And that's been a disadvantage. So I think other places can learn from that.

And I think the big lesson of taking this broader look at the history is, you see that Silicon Valley was lucky enough to have the conditions that allowed the little green shoots to flourish. Another really big factor is this ocean of money that is flowing from the Pentagon to private sector defense contractors. And so the biggest employer in Silicon Valley from 1954, when it established its missiles and space division in Sunnyvale, all the way through the 1980s, is Lockheed. It was a huge factor in bringing people in, and it's all military business.

I think that history creates opportunities for other places around the world to say, "We would like to create an entrepreneurial economy. What do we have here that we can build on? And what kind of place do we want to create? How can we create a place that is more equitable? How is there a market opportunity here in building things that Silicon Valley is not thinking to build?"

DP: Was there much of that sort of intentional thinking in the early days of Silicon Valley?

Ike Eisenhower never sat in the Oval Office and said, "We shall build a science city there." But they effectively did. It's this wonderful "only in America" story of happy accidents and serendipity. But I do think Fred Terman was someone who was very deliberate about what was being built, and in fact developed part of Stanford's land. So Stanford had another strong advantage in that it had this 9,000-acre property around its campus. Terman was like, "We're going to build a research park."

AK: Tech today is really rejecting this suburban office park world. Physically speaking, if someone was interested in helping create a tech capital, what kind of structure should they be thinking about?

There has been a really sharp trend towards more urbanized investing. So back in the day, Silicon Valley was a hardware place. Now tech is a software business. And so that has changed the geography. What it takes to start a startup now versus 20 years ago has also changed. Twenty years ago, you needed a $5 million round just to hire people, but also get space. There's all these upfront capital costs that now don't come into play. It frees up the geography.

The other thing is, this is the year of COVID. What's really interesting now is this forced experiment en masse for everyone to be remote working. So that's a big, huge sea change. And then the other thing is that business is still being done, deals are still being made.

DP: But a lot of the trends you're describing had been true, at least for a few years, and in some cases longer. Meanwhile, all the things that have always sucked about Silicon Valley just keep getting worse. So you would think it at some point, it feels sort of surprising that nothing else has really come to take over this mantle as the place people want to be more than Silicon Valley. What is the sticking power?

Part of this are just the laws of conglomeration and path dependency. The Valley's obituary has been prematurely written a number of times. It's a boom and bust place. You have these cycles. The defense economy contracted significantly at the end of the '60s. And everyone's like, that's it, that was fun, time to go. And, of course, that didn't happen.

So there is the sticking power. One of the big things that is sticking is money. So the money men (and some women) are there. Some of these VC firms have been around for a really long time, like Sequoia Ventures and then some newer old-line firms like Andreessen Horowitz that are still just making bank. That's persistent. Some of those people are leaving, but it's not a mass exodus. And so that's what's interesting to me is you now have a startup geography that is truly global, but the venture, it's still just this giant bubble around the Bay Area.

AK: It's not that Silicon Valley will ever be over, but that other places will very slowly become increasingly important as tech expands? And we end up in this place where Silicon Valley never goes away? But you have this ethos of Silicon Valley in a ton of different places that are all as important.

Look, no region rules forever. Just ask Detroit. It's going to be interesting to see what the next decade brings regarding regulation and antitrust and what that does to the landscape and the market. 2020 is going to be a hinge of history, as we call it, for many reasons, for a lot of reasons.

You know, there is some control over what happens, we don't just sort of lie down and let the market or history roll over us. So Silicon Valley was great. How do we both take some of the things that are really vital about it and iterate it somewhere else in a way that makes it even better? Or maybe work on technologies that are more directly addressing some other big problems that the world is facing? What are the things that we're doing well, and what are the things that aren't working?

AK: What's your answer to that question? What do we take out of 2020?

I don't know yet. It's too soon to tell. The Valley is different, but it's not over. We're entering a new stage in its history. You just have so many companies that are being acquired rather than growing to maturity, and that isn't sustainable. There needs to be some intervention there. And it looks like the intervention is coming in the form of antitrust suits and regulation. And look, antitrust suits can have a significant effect on the market, even if they don't come to anything. Just because of their existence, Microsoft was a changed company. It did change them. My hope would be that this creates opportunity for people in different geographies, and people doing different kinds of things. And people who don't look like they are from the same backgrounds. The network of the Valley was part of its secret, but it's also its Achilles heel.

DP: If there's going to be a next 2021 hotspot of everybody moving in tech, it's going to be Austin. If you had to put on your 50-years-from-now cap, what is it about Austin that is so attractive at this moment?

Part of Austin's attraction is it actually has been working on this for about 30 or 40 years. It's not as mature in the lifecycle as Silicon Valley, but it has some maturity. You have UT Austin going all the way back.

The places that are really going to compete with Silicon Valley are the ones that are offering something that Silicon Valley no longer does. Austin is cheaper, relatively speaking, than Palo Alto, in terms of home prices and labor costs. The other advantage is no state income tax. Employers see that. It really affects the bottom line, because they get to pay less than they do in California, because the employee isn't paying state income tax. That's a big attraction.

Austin also has this quality of place. It's a city, it's got music, it's got stuff happening, it's got the urban vibe. It's not as big as the Bay Area, it's not as sprawling. It has these advantages also because it's been at the game long enough, and you have companies like Dell that have been there for a long time. There's human capital. There's a certain service firm specialization, though not to the same degree that you have in the Valley. The venture money can travel. Big, second-tier places like Austin are going to be thriving, particularly in this new era when geography is becoming much more flexible. It's no longer, "To make it, I have to go to the Bay Area or Seattle," that's no longer that case.

AK: Are there other places like Austin that are just further in the past but perhaps on the path?

I'm looking a lot outside the U.S. That's the other big trend. If you look at where the growing startups are, there are a lot in China, and they're in Canada. Both Toronto and Vancouver are places to watch. They're taking advantage of the higher education infrastructure, a few generations of companies and management expertise, the growing venture systems. Canada is also rightfully taking advantage of immigration, because the U.S. has been making it difficult for people to come here and stay here. The U.S. was the destination for the smart, young people who wanted to get a degree, start a company, and now we've really messed that up pretty fundamentally. U.S. immigration policy is a key ingredient of not just Silicon Valley's tech dominance, but the U.S. tech dominance, and we've messed that up badly and need to rectify it.

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