Decades ago, the Santa Clara Valley economy was fueled by plum orchards and cattle.
Today, the Valley is best known by another name: Silicon Valley. And its transformation into a buzzing industrial pocket was driven by young engineers who turned their dreams into fast-growing corporations with the help of venture capitalists.
“Silicon Valley is the birthplace of the computer and software industry and it’s way ahead of the curve,” said Dave Witherow, president of VentureOne, a San Francisco research firm that tracks venture capital investments.
“The lines between technology and investors are well connected in Silicon Valley, more than anywhere else,” he said.
Last year, $10.8 billion of venture capital were pumped into startup companies nationwide, according to VentureOne. Of that, $2.8 billion went to high-tech companies in Silicon Valley, according to the firm.
By comparison, Los Angeles and Orange counties combined to receive just $400 million in venture capital for the same period.
Why does so much venture capital go up north? The answer lies in the history of the area and the presence of Stanford University in Palo Alto.
With one of the nation’s most prestigious engineering departments, Stanford emerged in the 1930s as a wellspring for new technology ideas and young entrepreneurs.
In 1939, Stanford graduates William Hewlett and David Packard started a precision electronics company using cutting-edge technology.
“They were the ones that started it all and it was all by accident,” said William Davidow, a former Intel executive who is now principal at Moh, Davidow Partners, a venture capital firm based in San Jose. “It started not only a company, but created a center for technology. And that center created a network between venture capitalists and new companies.”
The industry grew slowly for its first 20 years. But by the late 1950s, semiconductors were rapidly replacing vacuum tubes triggering a new industry.
Arthur Rock, then a young investment banker with Hayden, Stone & Co., remembers trying to help get financing for Fairchild Semiconductor in 1957.
Financing wasn’t easy to come by in the early days, he said. The reason: technology startups had no track record, and bankers, brokerage firms and other would-be investors lacked historical data to make industry comparisons.
The lack of financing sparked an idea for Rock. Realizing a huge earning potential, he moved from New York to San Francisco and founded Davis & Rock in 1961 the Silicon Valley’s first venture capital firm.
“Back then everything was so exciting we really had hit upon a new idea, a new frontier,” said Rock, who now runs a venture capital firm bearing his name.
“After others saw the kind of returns, tons of venture capital firms focused on Santa Clara,” he said. “Everyone wanted to be in on the act in the 1970s.”
In the late 1960s, two former Fairchild executives, Robert Noyce and Gordon E. Moore, wanted to branch out on their own. Rock helped entice 25 other investors to put up $2,350 each to allow Noyce and Moore to form Intel.
Startup financing took on a life of its own after that, and Silicon Valley became a region for venture capitalists to mine.
Indeed, the symbiotic relationship between the high-tech industry and financial markets in the last quarter century has made millionaires of scores of entrepreneurs and investors, and produced companies that have become household names. And the industry’s biggest boom in the 1980s fostered venture capital-backed companies such as Apple Computer, Compaq Computer and Lotus.
“I remember knocking on a lot of doors and encouraging people to start businesses, and that really doesn’t happen anymore,” said Tim Draper, whose firm Draper Fischer Associates is in Redwood City. “I still encourage really super people to start businesses, but we have so many and such a great deal of flow here, it’s gotten more reactive than proactive.”
He said venture capitalists are to thank for getting the ball rolling when companies were poised to blaze new trails but could not get the financing to get started.
The region’s executives continue to take a vested interest in entrepreneurs and up-start firms sometimes becoming investors themselves. The region has even founded Joint Venture: Silicon Valley Network, a business association for area technology firms.
Local entrepreneurs can submit business plans to the association, which are uploaded onto a computer network and later matched with possible venture capitalists.
The region’s success has spawned duplications throughout the nation including San Diego, the Pacific Northwest and Boston.
Los Angeles County has also sought to emulate the financial boom, but so far with only modest success.
“Los Angeles high-tech isn’t even on the map they don’t even make a dent. It’s all about location and history,” said Witherow.
Furthermore, the L.A. firms are going head-to-head against billion-dollar powerhouses in Silicon Valley.
“Venture capitalists are going to spread their money when they find a good idea no matter (what location) the idea comes from,” said Mark P. Sanborne, a general partner at venture capital firm Lewis & Associates in Westlake Village.
“But, all the attention is up there. There is a better network among the players up there. That’s what we’re lacking.”
He said Silicon Valley’s technology industry is continually bolstered by new entrepreneurs touting new ideas. In Silicon Valley, these investors are always on the lookout to plunk down millions to promising start-ups.
But for all the wealth in Southern California, there’s a startling dearth of investment capital available for early-stage companies.