The Silicon Valley Model and Technological Trajectories in Context (2024)

“Silicon Valley” has many meanings. It is at once an economic model, a geographic region, a set of industries, and a series of technological and organizational innovations. Especially in recent U.S. discourse, “Silicon Valley” also stands in for a set of social issues and works as shorthand for a variety of entrepreneurship-related values, both admirable and disreputable. Internationally, “Silicon Valley” is simultaneously a competitive threat, an opportunity to be harnessed, and a source of applicable lessons for startup ecosystems and innovation in other geographies. These meanings must all be disentangled to enable a valuable discourse.

Over the past few decades, various localities around the world have attempted to copy or emulate aspects of Silicon Valley to foster entrepreneurship and develop their own startup ecosystems. Most have not been successful. They have often suffered from a limited understanding of how the Silicon Valley ecosystem works, and they have often fallen victim to politically expedient strategies that seek to achieve flashy, short-term results rather than to build the foundations of a successful ecosystem.

This piece provides a more complete picture of the Silicon Valley startup ecosystem as an economic model, distilled into its main components. Critically, it also explores the interdependencies among these components. Taken together, these components and their interdependencies can provide a powerful analytical tool for understanding and developing startup ecosystems elsewhere. Yet the startup ecosystem cannot be discussed only in abstraction, because it grew out of a specific regional context at a particular historical moment and developed hand-in-hand with particular technological opportunities and organizational experimentations. An understanding of this context is also critical for formulating strategies that can make use of various local environments.

This piece begins with a brief overview of the polarized U.S. context for discussions of Silicon Valley and introduces the Silicon Valley economic model as a useful analytical framework. It then examines the region within which that model is embedded and concludes with an overview of the technological and management innovations pioneered by Silicon Valley companies.

The Silicon Valley economic ecosystem is characterized by the following elements:

  • It can be distilled into its primary components: (1) venture capital, (2) human capital, (3) university-industry ties, (4) direct and indirect government support, (5) industrial structure, and (6) support ecosystem of professional service firms.
  • Each component is interdependent on the others.
  • Each component develops virtuous spirals—favorable developments reinforcing and accelerating subsequent developments—over time to achieve self-sustained growth.
  • The components can be used as variables by localities around the world to evaluate and formulate policy to foster their own startup ecosystem.

Silicon Valley as a geographic region has the following notable characteristics:

  • The Silicon Valley economic ecosystem has expandedto encompass much of the San Francisco Bay Area, especially from the 1990s onward as it grew from a historical semiconductor manufacturing cluster in and around Santa Clara County.
  • There is no cohesive “Silicon Valley government,” a circumstance that has led to infrastructure and public transportation fragmentation, housing policies that increasingly disadvantage lower-and middle-income residents, and the lack of a cohesive regional industrial and residential development strategy.
  • The region experienced a transformation from manufacturing to high-tech industries, starting in the 1980s and accelerating in the 1990s. As a result, it is characterized by inflows of top talent from around the world and outflows of individuals who have been priced out of the region.
  • Many of the pressing social challenges are exacerbated by local and regional political dynamics and may not be an inevitable outcome of the economic model itself.

Silicon Valley’s technological phases and organizational management innovations include the following:

  • Valuing the creation of new approaches that transform or disrupt established structures, logics, and organizations remains a core element of Silicon Valley’s ethos.
  • Although the region had industrial antecedents in the pre–World War II period, the Cold War defense industry and massive government expenditures to develop and deploy new technologies formed Silicon Valley’s industrial base.
  • The use of venture capital as a novel way to finance startups was refined and matured in Silicon Valley—innovations in finance drove innovative startups.
  • The semiconductor industry fueled a large wave of new companieswith organizational innovations such as nonhierarchical corporate structure, the development of modern venture capital, and high labor mobility that conferred competitive advantages and differentiated the region from incumbent corporate America.
  • The computer industry reshaped the dynamics of global competition and value creation particularly suited to founding new fast-growth companies as modularly designed personal computers enabled platforms, a software industry independent from hardware, and numerous companies specializing in each of many computer components.
  • As the Silicon Valley ecosystem matured, it remained at the forefront of digital technologies such as activities enabled by the internet, cloud computing, social media, smartphones, the Internet of Things, artificial intelligence (AI), and climate-related technologies, even as it also was home to a robust biotech industry.
  • Silicon Valley’s evolution has been characterized by several waves of bubbles, with survivors from each wave growing into larger companies that often transform industry.

The Context of a Divided and Polarized United States

This analysis takes place at a time when numerous conflicting U.S. domestic narratives about Silicon Valley threaten to obscure some of the main policy lessons it offers for regions and jurisdictions elsewhere in the world. There is an acute disconnect between Silicon Valley’s role in domestic U.S. social issues and the strategic position of Silicon Valley with regard to industrial development and innovation policies for different regions around the world. Intense political polarization in the United States exacerbates the challenge of objectively discussing the strengths, weaknesses, and lessons to be drawn from the ecosystem, as well as the constructive connections that can be developed.

For some of the 1980s and much of the 1990s, and again from the early 2000s to the mid-2010s, celebratory narratives around technology and innovation depicted young, risk-taking Silicon Valley entrepreneurs building new companies and creating new technologies to challenge older corporate America. Silicon Valley dynamics were seen as driving global innovation, and inspired optimism that technological development and deployment would advance civilizational progress.1 By the late 2010s, however, such narratives gave way to concerns about Silicon Valley firms recklessly disregarding users’ personal privacy, entrepreneurs audaciously ignoring the law in pursuit of expansion, and the toxic workplace culture and predatory investors that led to the #MeToo movement calling out sexual harassment in major industries.2 A broad, general concern was the sense that the very success people had celebrated was contributing to extreme concentrations of wealth and power in a handful of big tech firms and individuals, stifling innovation and even threatening the tenets of democracy both inside the United States and around the world. Astonishing levels of income inequality in the San Francisco Bay Area, as well as the crime and housing instability that seemed to be visibly exacerbated by the pandemic, added to the increasingly negative trend in the Silicon Valley narrative.3

Since the early 2020s, objective discussions about the Silicon Valley ecosystem have become increasingly difficult within the United States as the zeitgeist has turned against the region and its business leaders.4 Overt enthusiasm about the Silicon Valley economic ecosystem risked criticism from those on the conservative side of the political and ideological spectrum who were skeptical of the “liberal” politics of California. At the same time, praise of the Silicon Valley ecosystem also drew critiques from progressives, to whom enthusiasm about the ecosystem could seem tantamount to condoning the immense income inequalities and social dislocations of the San Francisco Bay Area, as well as the problematic aspects of the ecosystem that triggered the #MeToo movement.

For the benefit of international readers, it is worth illustrating these dynamics with a bit of first-person texture. In many parts of the United States, any discussion of the strengths of Silicon Valley companies or the ecosystem will often be met with immediate skepticism. One must first disassociate oneself from some of the worst social aspects of the ecosystem before proceeding into an objective analysis. For example, an attempt to point out how Tesla revolutionized the global electric vehicle market, forcing an adjustment of the automobile industry worldwide, often will run into sharp condemnations of CEO Elon Musk’s polarizing views and controversial actions—to the detriment of objective analytical conversations. Even presenting the Silicon Valley economic ecosystem as an analytical framework, as provided below, requires a preface such as this to ensure that a large segment of readers does not automatically discount the analysis on its own merits. Such is the climate in current U.S. discourse.

At the same time, internationally, Silicon Valley is simultaneously a series of opportunities to harness and observe, and a producer of acute competitive challenges. Silicon Valley companies have transformed value-added activities by providing the underlying information technology infrastructure and software. Many of the world’s largest industries, such as the automobile industry, currently face historic upheavals created by Silicon Valley companies. The latest developments in AI are poised to drive a sea change in how people work across countries and sectors. As governments increase their industrial policy efforts, exemplified by U.S. legislation such as the Inflation Reduction Act and the CHIPS and Science Act, they have chosen to target many of the industries that Silicon Valley specializes in, such as semiconductors, climate-related technologies, and cross-national supply chains. Silicon Valley firms are also at the epicenter of emerging debates about regulating AI. Governments and policymakers at both the national and subnational levels around the world seek to benefit from entrepreneurial dynamism and high-growth startups. At the same time, many recognize the dangers of dependence on big tech firms from Silicon Valley and an exodus of talent. Their economic development strategies are therefore both defensive and forward-looking.

Discussion of the Silicon Valley economic model serves to inform these international strategies, as well as to rebalance some of the U.S. discourse that has gone too far from celebration to condemnation, and is now ripe for a more objective analysis.

The Silicon Valley Economic Model

The Silicon Valley economic model provides a useful analytical framework when differentiated into its primary components:5

  • Venture capital as the core funding mechanism for high-growth startups
  • Flexibly deployed human capital drawing upon global talent
  • Robust and multifaceted university-industry ties
  • Direct and indirect government support
  • An industrial structure of symbiosis between large firms and startups
  • A robust support ecosystem of professional service firms such as law firms, accounting firms, and startup accelerators, incubators, and supporters.

The components are interdependent, each requiring every other component to function effectively.

The Silicon Valley Model and Technological Trajectories in Context (1)

For example, venture capital works best when human capital deployment is flexible, with potential entrepreneurs and employees coming from large and small firms that attract people worldwide. Anchor universities such as Stanford University and the University of California Berkeley also draw top-tier people from around the world who undertake research, spin out startups, and provide focal points for various actors to meet.

Each component developed over time, enjoying virtuous spirals along the way. For example, as top venture capitalists realized extremely high returns, they attracted more investors and more venture capitalists entered the market, enabling more startups to receive funding. More funding enabled a greater number of startups, increasing the probability that more would succeed and produce high returns, which in turn further attracted new investments into venture capital. This cycle drove even more venture capital investing and subsequent startup opportunities.

As startups spun out of university research, the successful ones grew into large companies, producing vast wealth for founders who often supported universities in various ways, such as donations, research collaborations, teaching, mentoring, introductions to their interpersonal networks, and other forms of support. This patronage by successful entrepreneurs who came out of the universities, as well as support from the rest of the alumni community, helped the universities accumulate experience and expertise in industry-university collaborations, facilitating subsequent rounds of university-industry collaboration and spinouts. The dynamics of each of these components, along with specific examples, will be covered in subsequent pieces of this series.

Policymakers can use these distilled components of Silicon Valley as a set of variables. The objective is not to encourage others to attempt to imitate all aspects of Silicon Valley, since the ecosystem grew out of a distinct history. Rather, it is a search for solutions in each component, given local assets and characteristics. For example, if top-notch universities exist, but do not have substantial experience with startup spinouts, what mechanisms and capabilities should be developed? What other ecosystem components already exist, and how can these be harnessed?

If the local venture capital industry is not well developed, should the locality pursue a strategy to grow a local venture capital industry? If so, how? Or, if transportation networks are well developed, should policymakers seek to harness a larger nearby venture capital community, enabling entrepreneurs or venture capitalists to move back and forth quickly and with minimal hassle? If harnessing the nearby venture capital community causes the locality to become a feeder, should the locality attempt to entice startups to expand back to their original locality as they scale up, and if so, what would be the enticement? Does the enticement solve real problems faced by the startups?

Does the locality have large firms capable of and interested in purchasing startups? If so, are regulatory requirements and local corporate organizational structures helping or hindering them? If corporate organizational challenges are a hurdle in successful symbiosis between large firms and startups, are useful executive training programs and bootcamps in place for teaching the management of large firms to work more effectively with startups?

What is the current state of virtuous spirals? Which ones are at early stages and which, if any, have begun feedback loops of sustainable growth with increased development driving further development? What is the current status of interdependencies?

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Table 1: Template to Evaluate Startup Ecosystem Components for Policymakers
Component VariableSilicon ValleyYour Locality
Current StatusVirtuous Spiral?Interdependencies?
1FinanceVenture capital???
2Human capitalFlexible, global draw???
3University-industry relationsMultifaceted, extensive???
4GovernmentDirect and indirect support???
5Industrial organizationLarge firm symbiosis with startup ecosystem???
6Support ecosystemProfessional services and a well-developed support ecosystem???

Silicon Valley as a Region: The San Francisco Bay Area

International visitors often ask whether Silicon Valley benefited from strategic regional planning by local governments. In fact, the opposite was true; as the Silicon Valley economic ecosystem grew throughout the San Francisco Bay Area, spreading across numerous counties, it ran into obstacles caused by the decentralized nature of political dynamics in the region as well as peculiarities of California’s model of democracy. Infrastructure and housing development suffered, contributing to the region’s deep income and societal inequalities.

Historically, when the term “Silicon Valley” was coined in 1971, it referred to the concentration of semiconductor firms and manufacturing facilities in Santa Clara County and the northwestern parts of San Jose County. Palo Alto, the area around Stanford University, was an epicenter of university spinouts and technology transfer that seeded development of the ecosystem. Genentech, which pioneered the biotech industry, later a core industry of Silicon Valley, was cofounded by a University of San Francisco professor in 1976 and headquartered in south San Francisco.6 Since then, as Silicon Valley developed as a distinct economic ecosystem, it extended throughout the whole Bay Area. Downtown San Francisco became home to numerous high-growth startups that evolved into global players such as Salesforce and more recently LinkedIn, Uber, Twitter, and many others. Downtown San Francisco is also home to a cluster of AI startups including OpenAI and Anthropic, which propelled large language model AI into a dramatically new stage of development in 2022.

The University of California Berkeley—the original University of California, founded in 1868—is located across the San Francisco–Oakland Bay Bridge from San Francisco, and has been a core component of the university-industry ties fueling the ecosystem. It played a pivotal role in the development of nuclear physics, and its historical ties to the semiconductor industry, computer and software industries, and high-tech startups were critical to Silicon Valley’s development. It also has numerous startup accelerators and hosts a wide range of university-industry collaborations.7 The East Bay counties were not originally an integral part of the Silicon Valley ecosystem, but as land and housing prices skyrocketed in the peninsula, office complexes spread out to the area, as did workers seeking larger and less exorbitantly expensive housing. Inflows of highly educated and motivated immigrant populations to areas such as Fremont and Newark pushed up school district rankings, attracting further flows of the Silicon Valley workforce.

Figure 2 maps an illustrative selection of tech companies, venture capital firms, startup accelerators and incubators, international innovation hubs, and international corporation offices across the Silicon Valley region.

The Silicon Valley Model and Technological Trajectories in Context (2)

The historical Silicon Valley of the 1960s through 1980s was home to a large number of manufacturing facilities. Even companies such as Apple had their primary factories in the region. When the industrial paradigm shifted to offshore manufacturing and development of cross-national production networks, most of the former manufacturing facilities became office complexes and residential areas, and much of the blue-collar factory worker population disappeared. As housing prices climbed and various corporate functions increasingly were replaced by software and outsourced labor, the high living costs of the Bay Area pushed out increasing numbers of residents. The Bay Area today has a far higher proportion of undergraduate and graduate degree holders than California or the United States as a whole. (Approximately 25 percent of Silicon Valley residents have graduate or professional degrees, compared to 13 percent for California and the United States; 28–35 percent have bachelor’s degrees, compared to 28–29 percent for California and the United States in 2021.) Though Silicon Valley has a highly paid workforce, the middle- and lower-income populations have come under greater pressure.

Some assets from Silicon Valley’s past were put to productive use and are even considered to have conferred advantages to new startups. An automobile manufacturing plant in Fremont, built in the mid-1980s as a joint venture between General Motors and Toyota, closed in 2010 and was sold to Tesla that year. This facility, less than half an hour away from Tesla’s Palo Alto headquarters, was where it first succeeded in mass-producing its electric vehicles and was the company’s sole vehicle manufacturing plant until 2019. Tesla’s vertical integration of the production process beyond other automakers is considered one of its competitive advantages.8

Of particular interest to international audiences is Silicon Valley’s jolting juxtaposition of strengths and visible shortcomings. Cutting-edge technology, fast-growth startup dynamism, temperate weather, and incredibly wealthy communities are outcomes of the successful economic ecosystem. Physical manifestations of the latest software, including driverless taxis, appeared in San Francisco in 2021, and the early diffusion of electric vehicles and extensive charging infrastructure (privately built by Tesla) became a distinctive feature of the region by 2020. At the same time, the region’s astonishingly underdeveloped public transportation infrastructure was evident in the train (Caltrain) linking San Jose to San Francisco, which continued to use heavy diesel passenger cars and offer infrequent service outside of commute rush hour. Plans for rail electrification were delayed for decades. More than half a century after the Bay Area Rapid Transit (BART) subway and rail system established plans to create seamless links across much of the Bay Area, system expansion delays counted in decades mean that BART has yet to link San Francisco and the East Bay to San Jose.9 Some of these disadvantages did provide opportunities; the very lack of convenient public transportation and frustration with local taxi services helped motivate and diffuse new ride-sharing businesses such as Uber and Lyft. Clogged freeways in a temperate climate (recent wildfires notwithstanding) created an environment conducive to autonomous driving.

Most jarring, however, is the extreme poverty and visible homelessness prevalent in certain areas of San Francisco, San Jose, and other parts of the Bay Area. While the extreme wealth created by the Silicon Valley ecosystem and rapidly rising housing prices are contributing factors, the continuing high rate of homelessness also owes much to national, Californian, and local politics, where a mix of policy debates and unintended consequences of broader policies have failed to provide adequate solutions. Some domestic U.S. debates assume that the wealth creation aspect of the Silicon Valley economic ecosystem inevitably causes the stark economic division and pockets of destitution. Yet Nordic visitors, for example, who enjoy extensive social protections at home, are less likely to see a successful startup ecosystem directly create the same challenges experienced by Silicon Valley. And to many in Japan, who have endured multiple decades of slow growth often attributed to the inflexibility of the country’s large elite companies with low labor mobility, the potential benefits of a vibrant startup ecosystem to introduce dynamism into the corporate sector and liquidity into labor markets outweigh concerns about economic dislocation that might be triggered if the Japanese startup ecosystem succeeds.

Technological Phases, Organizational Management Innovations, and Silicon Valley’s Development

Silicon Valley’s development is inextricably linked with the development and diffusion of several major new technological phases. Silicon Valley companies innovate and commercialize new technologies, product areas, and industries. In doing so, they develop new management practices and organizational structures.

California as a state was transformed in its infancy by a key technological revolution of the industrial age: the railroad. When California joined the United States in 1850 as the thirty-first state following the Gold Rush of 1848, it took travelers four to eight months just to reach the state from the East Coast.10 The intercontinental railroad, completed on the Pacific end by Central Pacific Railroad president Leland Stanford, radically reduced this travel time to just four days. The transformative transcontinental railroad was built as a national government investment into a private enterprise–built transportation infrastructure—an early link between government investments and disruptive technologies.11

In the early twentieth century, when the United States had completed its expansion to the western end of the continent, annexed numerous Pacific islands, and extended its reach to the Philippines, long-range radio was a niche but critical technology. It was a market in which notable San Francisco–based firms specialized. Stanford University’s first president was an early investor in such a company, founded by early graduates of the university.12 Electronic components continued to be critical technologies for Bay Area companies during World War II, when Hewlett-Packard, established in 1938, sold electronics equipment including audio oscillators and wave analyzers to the U.S. military.13 (Cofounder David Packard later became deputy secretary for defense during Richard Nixon’s presidential administration from 1969 to 1971.)

As the Cold War intensified in the 1950s, the Department of Defense became critical to the Silicon Valley ecosystem’s industrial foundation. The department acted both as a massive investor into research at universities and companies and as a lead buyer of equipment. It was already a major procurer of electronics equipment from companies such as Varian Labs, established in 1948 by Stanford faculty, but it dramatically increased procurement when transistors were commercialized in the late 1950s. The defense industry remained a major presence in the region through the 1970s; until the 1980s, Lockheed Martin was the region’s largest employer.14

As the United States raced the Soviet Union to build intercontinental ballistic missiles and satellite capabilities, the semiconductor industry became key to Silicon Valley. William Shockley, joint recipient of the 1956 Nobel Prize in Physics for the invention of transistors in the late 1940s and early 1950s, set up Shockley Semiconductor Laboratory in Palo Alto in 1956, but a group of star engineers left to found Fairchild Semiconductor in 1957.15 Fairchild attracted and produced talent that went on to develop key companies in the Silicon Valley ecosystem, such as Intel, AMD, venture capital firm Kleiner Perkins, and law firm Wilson Sonsini. The mobility of employment and frequent creation of new companies was distinctly different from established East Coast large corporate cultures. This fluidity led to the development and deployment of stock options as a means of retaining talented employees. New corporate organizational structures, reflecting company cultures pioneered in companies such as Intel in the 1960s, flattened the hierarchies typical of the large, vertically integrated structures of mainstream corporate America, which at the time had strict career ladders and less mobility.16

The Nasdaq stock exchange, founded in 1971, specialized in listing new companies with less rigorous requirements than the New York Stock Exchange. Consequently, it became the exchange of choice for venture capital–funded initial public offerings (IPOs). Intel was listed on Nasdaq the same year the exchange was launched, followed by notable companies such as Apple and Microsoft, listed in 1980 and 1986 respectively. Massive returns to early investors helped establish and legitimize modern venture capital as a distinct set of entities. The computer industry drove much of Silicon Valley in the 1980s, with companies such as Sun Microsystems, founded in 1982, becoming leaders in computer servers and workstations, and Oracle growing into a global corporate database company.

An architectural transformation of computers with the advent of the IBM Personal Computer, introduced in 1981, led to an entirely new computer industry conducive to the creation of large numbers of hardware and software firms. Earlier versions of computers had been vertically integrated servers and workstations, but the modular design of personal computers created numerous separate markets for constituent components, such as memory, storage, networking, various chipsets, displays, and peripherals, each with large numbers of specialized firms competing against one another.17 Through this industrial transformation that sped up and decentralized innovations, the computer industry helped to propel the U.S. economy out of its 1980s recession and became a core driver of economic growth.18 The accumulated expertise, fundraising opportunities through venture capital, and dense interpersonal information exchange in Silicon Valley made the region central to the rise of the global computer industry.19

The dominant computer operating system, provided by Microsoft, introduced several new logics of competition—namely, platforms and network effects—and its common operating system enabled explosive growth in the software industry. Software no longer needed to be bundled with any specific computer if it was compatible with the operating system, spawning a vast industry for “shrink-wrapped” software that users themselves could purchase and install. The computer industry was no longer a small set of large companies developing custom software integrated with computer servers and workstations. The concept of platforms, and the way that owners of platforms could shape industries and capture disproportionate value, was a new logic of competition that affected global competition beyond the computer industry.20

As the internet became a global, open platform in the late 1990s, Silicon Valley experienced a frenzy of investment into the transformative potential of the internet, fueling the “dot com” boom of internet-related startups undergoing IPOs on the Nasdaq exchange. The boom brought global attention to the Silicon Valley ecosystem, reflected in a flurry of pathbreaking analyses examining the ecosystem as a region with distinctive economic features and global linkages.21 The dot-com bubble burst in 2000, driving out many firms, but by the mid- to late 2000s various surviving companies such as Google and Amazon had redefined uses of the internet. Internet-based services transformed how information was used in various industries and consumers’ lives around the world. Business application platforms such as Salesforce redefined enterprise IT systems, and a resurgent Apple became one of the world’s most valuable companies. The social networking service Facebook, founded in 2004, began to grow rapidly within the space of a few years, and by the mid-2000s global scale cloud computing had reshaped computing power and platforms into services, allowing the startup ecosystem to thrive and large corporations to experiment and scale their activities.

The advent of smartphones in the late 2000s, driven by Apple, Google, and their app platforms, disrupted a wide range of industries including digital cameras, dedicated portable music players, copy machines, printers, and cell phones. Smartphones displaced incumbent firms while breaking down industry distinctions, bringing into competition large companies that previously had seldom competed directly.

Table 2: U.S. Firms with Highest Market Capitalization
1995200020202023 (Aug)
RankFirm$bnFirm$BnFirm$BFirm$B
1General Electric92.3Microsoft492.5Microsoft1199.6Apple*2609.0
2ExxonMobil82.7Cisco Systems *453.9Apple *1112.6Microsoft2146.0
3AT&T81.2General Electric417.2Amazon970.7Alphabet*1330.2
4Coca-Cola71.9Intel *391.8Alphabet (Google) *798.9Amazon1058.4
5Wal-Mart58.9ExxonMobil268.6Facebook *475.5Nvidia*686.1
6Philip Morris55.7AT&T236.7Berkshire Hathaway442.9Berkshire Hathaway675.7
7Merck53.2Oracle *217.3Johnson & Johnson345.7Tesla*656.4
8IBM48.3Lucent214.2Wal-Mart321.8Meta * (Facebook)549.5
9Procter & Gamble45.5Wal-Mart212.7Visa316.2Johnson & Johnson483.6
10Microsoft41.3IBM193.8JP Morgan Chase276.8Visa475.3
Note: Highlighted companies are venture capital–funded IT corporations; starred companies are headquartered in Silicon Valley.

Source: “America’s Most Valuable Companies 1995-2023,” American Business History Center, August 2023, https://americanbusinesshistory.org/americas-most-valuable-companies-1995-2023/.

A “cleantech” bubble in renewable energy–related industries formed and burst with the global financial crisis of 2007–2008. Spectacular failures included the solar panel manufacturer Solyndra, which could not hold out even with government subsidies, while survivors such as Tesla later thrived. Startups founded just before or during the global financial crisis, such as Uber, Dropbox, YouTube, and Airbnb transformed the logic of several industries, including taxis, short-term apartment rentals and hotels, and consumption of video content.

From the mid-2010s, a vast influx of capital relative to the venture capital industry began flowing into Silicon Valley as various forms of private equity began investing in pre-IPO markets. The total assets under management in California overall rose from $71 billion in 2005 to $112 billion in 2015, $309 billion in 2020, and $479 billion in 2022. (More specific and detailed data will be introduced in a later piece of this series, which will focus on venture capital.) This rapid rise of venture capital funding went hand in hand with growing valuation of companies and large IPOs; the term “unicorn,” referring to pre-IPO companies valued at $1 billion or more, was coined in 2013.

In the mid-2010s, the Internet of Things, which connects industrial devices to networks, began spreading widely to large global firms, providing a major area for collaboration between startups and global corporations. A once obscure branch of AI—deep learning with neural networks—experienced a series of breakthroughs as algorithmic image recognition capabilities exceeded those of humans in 2015. The following year, an AI program defeated world-champion Go players. The program was developed by Deep Mind, a company purchased by Google, and through its victory against the human players—a feat previously considered impossible—ushered in a new era of AI. Tesla, headquartered in Palo Alto at the time, succeeded in mass-producing electric vehicles in its Fremont factory from 2018 and 2019 onward. The company transformed the landscape of electric vehicles with its manufacturing process, privately built charging infrastructure, and new paradigm of software-controlled automobiles.

From 2020, as the coronavirus pandemic lockdown forced many businesses and people to work virtually, demand for services provided by Silicon Valley tech giants and startups grew rapidly. An influx of venture capital reached a peak in 2021, but as rising inflation in 2022 led to sharp increases in central bank interest rates in the United States and Europe, venture capital investments, IPOs, and startup fundraising declined sharply. Silicon Valley firms, including large ones such as Google and Meta (formerly Facebook) that had almost doubled their workforce between 2019 and 2021, engaged in several rounds of layoffs.

In late 2022, OpenAI released ChatGPT, ushering in a new era of AI using a category of deep learning for language processing to generate uncannily human-like text and perform functions such as summarization, categorization, and production of various outputs. Regulatory debates worldwide concerning AI have been driven by this rapid advancement. The programs raise a wide range of questions and issues around the inputs (that is, what content the algorithms are allowed to use to train themselves) and the vast possibilities of outputs and the ways they may be used and identified as distinct from human-generated content. A burst of interest and investment into generative AI may very well fuel another bubble, but given the history of Silicon Valley and the nature of venture capital, as will be discussed in a subsequent piece, this is likely a structural feature of the ecosystem.

As Silicon Valley continues to produce innovations and remains the world’s most developed startup ecosystem, it will provide further lessons and valuable linkages to regions around the world. The next piece in this series will look at venture capital, a topic often misunderstood by local policymakers attempting to foster investment vehicles as the cornerstone of their startup strategies.

Notes

1 These celebratory narratives include those of Steve Jobs returning to Apple to rebuild it into a multi-industry disrupter; Mark Zuckerberg dropping out of Harvard University and moving west; the radical growth of Google; and the ways in which Uber and Airbnb injected flexibility into industries that been stagnant for decades. See, for instance, Steven Levy, In the Plex: How Google Thinks, Works, and Shapes Our Lives (New York: Simon & Schuster, 2011); Steven Levy, Facebook: The Inside Story (London: Penguin UK, 2020); and Walter Isaacson, Steve Jobs (New York: Simon & Schuster, 2011).

2 See, for instance, John Carreyrou, Bad Blood: Secrets and Lies in a Silicon Valley Startup (New York: Larousse, 2019); Mike Isaac, Super Pumped: The Battle for Uber (New York: W.W. Norton, 2020); Ellen K. Pao, Reset: My Fight for Inclusion and Lasting Change (New York: Spiegel & Grau, 2017); and Susan Fowler, Whistleblower: My Unlikely Journey to Silicon Valley and Speaking Out Against Injustice (New York: Penguin, 2021).

3 By some measures, such as violent crime, San Francisco has not worsened in recent decades, but some high-profile exits of major retailers from the city’s downtown and catchphrases such as “doom spiral” have captured the popular imagination. For example, see Nathan Heller, “What Happened to San Francisco, Really?” New Yorker, October 23, 2023, https://www.newyorker.com/magazine/2023/10/23/what-happened-to-san-francisco-really. The neighboring city of Oakland in particular has experienced a crime surge in 2023. See, for instance, Shomik Mukherjee, “Oakland Business Owners Call for State of Emergency on Crime Amid Symbolic Strike,” Mercury News, September 26, 2023, https://www.mercurynews.com/2023/09/26/oakland-business-owners-call-for-state-of-emergency-on-crime-amid-symbolic-strike.

4 See, for example, pieces such as Ted Chiang, “Silicon Valley Is Turning Into Its Own Worst Nightmare,” Buzzfeed News, December 18, 2017, https://www.buzzfeednews.com/article/tedchiang/the-real-danger-to-civilization-isnt-ai-its-runaway; Laura Sydell, “As Views of Tech Turn Negative, Remorse Comes to Silicon Valley,” NPR, April 9, 2018, https://www.npr.org/sections/alltechconsidered/2018/04/09/600140471/tech-executives-say-were-so-sorry; and Andrew Marantz, “Silicon Valley’s Crisis of Conscience,” New Yorker, August 26, 2019, https://www.newyorker.com/magazine/2019/08/26/silicon-valleys-crisis-of-conscience.

5 This conception is modified from an earlier articulation in the following working paper, of which the author was a primary contributor: Richard Dasher et al., “Institutional Foundations for Innovation-based Economic Growth,”National Institute for Research Advancement, July 7, 2015, https://www.nira.or.jp/pdf/e_1503report.pdf.

6 Sally Smith Hughes, Genentech: The Beginnings of Biotech (Chicago: University of Chicago Press, 2011).

7 Martin Kenney and David C. Mowery, Public Universities and Regional Growth: Insights from the University of California (Stanford, CA: Stanford University Press, 2014).

8 Charles Morris, Tesla Motors: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries (Self-published [Kindle], 2021). For several months in 2020, the Tesla Model 3 built in the company’s Fremont factory was the fourth-highest-selling sedan in the United States, including gasoline-powered cars. See “2020 U.S. Vehicle Sales Rankings – Every Vehicle Ranked By Sales Volume,” Good Car Bad Car Automotive Sales Data, accessed November 13, 2023, https://www.goodcarbadcar.net/2020-us-vehicle-sales-figures-by-model/.

9 Michael C. Healy, BART: The Dramatic History of the Bay Area Rapid Transit System (Berkeley, VA: Heyday, 2013).

10 It took an estimated five months to travel to California by going around Cape Horn or roughly four to eight months by horse-drawn buggy across North America.

11 Roland De Wolk, American Disruptor: The Scandalous Life of Leland Stanford (Berkeley, CA: University of California Press, 2019).

12 Timothy J. Sturgeon, “How Silicon Valley Came to Be,” in Martin Kenney, ed., Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region (Stanford, CA: Stanford University Press, 2000), 15–47.

13 David Packard, David Kirby, and Karen R. Lewis, The HP Way: How Bill Hewlett and I Built Our Company (New York: HarperBusiness New York, 1995).

14 Stuart W. Leslie, “The Biggest ‘Angel’ of Them All: The Military and the Making of Silicon Valley,” in Kenney, Understanding Silicon Valley, 48–70.

15 Margaret O’Mara, The Code: Silicon Valley and the Remaking of America (New York: Penguin, 2020).

16 AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press, 1994).

17 Carliss Y. Baldwin and Kim B. Clark, Design Rules: The Power of Modularity (Cambridge, MA: MIT Press, 2000).

18 John Zysman and Michael Borrus, “Globalization With Borders: The Rise of Wintelism as the Future of Global Competition,” Industry and Innovation 4, no. 2 (1997): 141–166.

19 Walter Isaacson, The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution (New York: Simon & Schuster, 2014).

20 Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1998); and Annabelle Gawer and Michael A. Cusumano, Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation (Boston, MA: Harvard Business School Press, 2002).

21 Saxenian, Regional Advantage; AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy (Cambridge, MA: Harvard University Press, 2006); Kenney, Understanding Silicon Valley; and Chong-Moon Lee et al., eds., The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship (Stanford, CA: Stanford University Press, 2000).

Kenji Kushida

Senior Fellow, Asia Program

The Silicon Valley Model and Technological Trajectories in Context (3)

The Silicon Valley Model and Technological Trajectories in Context (2024)

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