Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region (Stanford Business Books)

296 Pages·2000·2.08 MB·English

by  Martin Kenney

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THE ANATOMY OF AN
ENTREPRENEURIAL REGION
EDITED BY
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STANFORD UNIVERSITY PRESS
STANFORD, CALIFORNIA
Stanford University Press
Stanford, California
©2000 by the Board of Trustees of the
Leland Stanford Junior University
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
Understanding Silicon Valley : the anatomy of an entrepreneurial region /
edited by Martin Kenney.
p. cm.
Includes bibliographical references and index.
!"#$ 0-8047-3733-9 (alk. paper) —%!"#$ 0-8047- 3734-7 (paper: alk. paper)
1. Santa Clara County (Calif.)—Economic conditions. 2. Santa Clara
County (Calif.)—Social conditions. 3. High technology industries—
California— Santa Clara County. 4. Business enterprises—California—
Santa Clara County. I. Kenney, Martin
HC107.C22 S3975 2000
330.97944—dc2i 00-034523
This book is printed on acid-free, archival-quality paper.
Original printing 2000
Last figure below indicates year of this printing:
09 08 07 06 05 04 03 02 01 00
Typeset in 10/13 Palatino
Acknowledgments
My thanks to two extremely able student assistants, Kimmy Pang and Kalela
McConnell. Their cheerful assistance made the process of assembling and editing
this book much easier. Laura Comay, the acquisitions editor at Stanford University
Press, has been extremely helpful and supportive. Finally, I would like to thank my
colleagues in the Department of Human and Community Development and at the
Berkeley Roundtable on the International Economy for creating a congenial place to
work.
Contents
Foreword by John Seely-Brown ix
Contributors xvii
1. Introduction i
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Part I: History
2. How Silicon Valley Came to Be 15
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3. The Biggest "Angel" of Them All: The Military and the
Making of Silicon Valley 48
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Part II: Institutions
4. Dealmakers and Counselors: Law Firms as Intermediaries
in the Development of Silicon Valley 71
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5. Venture Capital in Silicon Valley: Fueling New Firm
Formation 9®
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6. High-Technology Agglomeration and the Labor Market:
The Case of Silicon Valley 124
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7. The Origins and Dynamics of Production Networks in
Silicon Valley 141
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Part III: General Explanations
8. Flexible Recycling and High-Technology Entrepreneurship 165
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9. Social Capital and Capital Gains: An Examination of
Social Capital in Silicon Valley 190
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10. Institutions and Economies: Creating Silicon Valley 218
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Notes 24
1
References
2
Index
5
3
27
9
Foreword
JOHN SEELY-BROWN
When I first came out to the West Coast, I never imagined I would find myself
writing a foreword about Silicon Valley. I was deeply suspicious of the place. My
intellectual roots were in Cambridge, Massachusetts, where I had come to believe
that the whole Silicon Valley thing that people were starting to talk about (the term,
we learn here, was coined in 1971) was wildly overhyped, the people subject to mind
rot, and the West Coast culture just a bit crazy. So my move to Silicon Valley was
made with great trepidation. Indeed, my second thoughts were so strong, that to
diminish cognitive dissonance between East and West and to prevent immediate
retreat, I sold my home next to Harvard Square before moving. I wanted to
eliminate anything that would make the return to "civilization" too easy—or so I
thought. That was all in the fall of 1978.
Two decades later, I realize that my career at the Xerox Palo Alto Research
Center (better known as Xerox PARC) has afforded me a much wider view of
civilization. In particular, it has provided me with endless opportunities to meet
with visitors from all parts of the world and in turn to visit nearly all parts of the
world. Everyone takes Silicon Valley seriously now. With these visits, hardly a day
goes by that I don't get asked to explain the magical brew that makes up Silicon Val-
ley. What is it? What makes it so special? Can it be copied? If not, why not? And if
yes, how? And what about that famous culture? What does it feel like to work for a
large East Coast company and yet be a part of the Valley? Does this give me a
different perspective—having to bridge those two quite different cultures daily? And
how are those cultures different?
viii 1/0+%3--7.?>(/6+
These are complex questions that raise serious issues about development—at the
regional, national, and even global level. I am not sure I've ever answered them to
the complete satisfaction of the people who asked. I'm pretty sure I cannot do them
justice in these few short pages. But I would like to try at least to raise some of the
points that seem to me most significant in trying to answer these questions.
But let me first say that I have often had the good fortune to address these
questions at academic workshops. How quickly I learned (albeit the hard way) that
simplistic generalizations don't cut it in the academy. Analytic precision, grounded in
deep empiricism with only a speck of speculation, is the coin of the day. So it should
be. And this book is an example of excellent empirical research, deep scholarship,
tested and testable hypotheses, all conducted with a substantial cross- disciplinary
flavor. Its deep engagement with the subject has provided evidence to support some
of my theories, challenged others, and directed me to new grounds for speculation. I
think it will do this for anyone prepared to read it closely.
My little contribution, however, may deviate from the high standards set in the
following pages, so I feel particularly privileged to be able to get my words in first. I
want to start with some of my own personal beliefs about the Valley and follow these
with some speculative remarks that emerge from my long-time collaboration with
Paul Duguid about the dynamics of knowledge creation and flow, both within the
firm and throughout a particular region. For yes, even in today's web-based world,
geography matters—perhaps even as much as in the past, but now for different
reasons. Then I'll end with a couple of words on why it is so difficult to replicate the
ongoing experiment that is Silicon Valley.
At the center of all questions about the Valley lies the matter of innovation—for
the Valley occasionally appears like a perpetual innovation machine. I say
"innovation" rather than simply "invention," because innovation, to me, means
invention implemented. And I have grudgingly come to realize that invention is often
the easy part of innovation. The hard part is usually the implementation. Here I was
particularly interested in Stuart Leslie's well-chosen quotation from a letter of
Frederick Terman. Terman was the Stanford University dean who played godfather
to Hewlett Packard and so many other early start-ups in the Valley. When he left the
university to work on radar during World War II, he wrote back to a colleague at
Stanford, "I had never be
Foreword xi
fore realized the amount of work required to make a device ready for manufacture
after one had a good working model." It was a lesson he clearly learned well as he
guided young Stanford graduates to innovative success.
Implementation, I would say, requires the three Fs—focus, focus, focus. First,
one must focus on a single value proposition pertaining to the initial invention.
Sounds easy, but this focus is hard because a single invention will often support
many different value propositions. Deciding on the right one to pursue requires
discipline, experience, and a touch of luck. After that, you must focus on assembling
a dedicated team to design and develop the invention into a product, then to market
that product qua its value proposition, then to create appropriate partnerships
around delivering and amplifying its value, and finally, to get mindshare for it. And
while doing all this—which is never as linear a process as the above makes it
appear—you also need to focus on your competition. Indeed, you need to be
permanently paranoid about the likelihood that someone else has the same idea and
is moving faster than you are.
The risk of competition and the risk of failure more generally are central to this
whole process. If you hit it just right, you can win big; but if you focus wrongly on
any one of the above issues, especially if you misjudge the customer value
proposition, it all may come crashing down around you. Fine, risk is the coin of the
day for any type of innovation. But Silicon Valley puts its own spin on risk. Here
taking risks around radical innovations is respected and encouraged. Be shrewd, you
will be told, and don't be timid: go for it.
Silicon Valley has developed some powerful ways to deal with the risk it pushes
you toward, however. You can see this if you take the advice to go for it and set out
to get a new company off the ground. For this, you need money (today, that's often
the easy part). You need legal help to start the company and protect your intellectual
property, or "IP." You need design talent to help define and craft your product. You
will need marketing talent to position and validate your product concept. You need
help to manufacture, test, and service it, and so on.
As the authors in this book explain, a good deal of Silicon Valley's strength lies
in the way it helps you deal with these matters, effectively helping you both take risk
and share risk. Some of these tasks you will want to take on in your firm—so you
need to hire the right risk-taking folks to join your firm. But many of these tasks you
will want to out
xii 1/0+%3--7.?>(/6+
source to experts or consultants well seasoned in the challenges you face and
perhaps willing in one way or another to help you spread your risk.
Where do you turn for that? That is not one of the hard questions to answer
about Silicon Valley. My fifteen-minute drive from home in Palo Alto to work in the
foothills behind Stanford University takes me by one of the best design firms in the
world. Next I pass one of the best legal firms for start-ups in the country. If I
continue down the road, I encounter one of the best marketing firms in the region.
(These are some of the nontechnological firms that make up what Martin Kenney and
Urs von Burg insightfully describe as the Valley's second economy.) And all around
lie not only the competitors of these firms but also countless other potential
partners, such as the numerous specialty shops and foundries that provide fast turn-
around on submodules for a product.
That there are so many kinds of help and so many suppliers for each kind is not
surprising. But what may be surprising is just how good these resources are and how
well the strengths of each are recognized. As I like to think of it, the knowledge in
these firms is extraordinary, and so is the knowledge about them. These two are
closely connected. The knowledge in any one of these grows daily because of the
intensity of the competition. And that competition is intense because in Silicon
Valley, people know so much about their competitors. The amount of knowledge
available about the players in the valley is incredible. As Martin Kenney and Richard
Florida show clearly in their chapter, venture capitalists (VCs) play a critical role in
sharing knowledge and might best be thought of as knowledge brokers. Indeed, in my
mind, they are more important for their network of connections than for their
money. Mark Suchman's chapter reveals how lawyers work this way, too.
Even at a more informal level, however—at parties, at restaurants, at sports
events, at your kid's school—you discover whom you need to meet, who is worth
working with, whom you should avoid, etc. Here's one reason why geography
matters. The density of the region matters because it enhances serendipitous
contacts. Couple this density of the Valley—caught as it is between the bay and the
ocean to the east and west, and the cities of San Francisco and San Jose to the north
and south—to the regional culture and you get a remarkable petri dish, as AnnaLee
Saxenian's chapter shows. For the culture here is amazingly
Foreword xiii
open to novel ideas and radical ventures and emerging forms of entre- tainment
(entrepreneurship is a form of entertainment in the Valley). All these are supported
by a social fabric that maintains constant, ongoing conversations through which you
can test and develop your thoughts, find folks to work with, and turn ideas into
action. As Stephen Cohen and Gary Fields argue, the Valley's social fabric is quite
distinct. It can also be quite casual. Benchmarking here takes on a new dimension.
It's not necessarily some formal process. Just go to lunch, hear the buzz, and you'll
quickly find out how you stand.
This dynamic that drives you, drives your competition, haunting both of you. It
haunts people, in particular, with the unsettling fear of becoming a has-been. Things
happen so fast that the step from being ahead to being passe happens in the blink of
an eye. It's not what you've done, but what you've done lately that counts. So you
made it big, even really big, but that was three years ago and maybe it was just luck.
If it wasn't, why haven't you done something great since? Unnerving, yes. But still,
very real. I actually hear billionaires who by anyone's standards would appear to be
outstanding successes complain about their fears along this dimension that leads to
the Valley's vanishing point.
Let me get back to the knowledge in the various organizations and institutions
that make up the Valley. Undoubtedly, we live in a valley of riches. We have two
major research universities and many smaller universities and colleges, and they all
play multiple roles. Most obviously, they prepare students to work in the Valley.
Here, I would point particularly to the great business schools that have stayed ahead
of the curve despite the profound shifts that information technology has brought to
business practices. I also applaud the excellent engineering schools that continue to
push these technologies harder and faster. Together these institutions continue to
provide a diverse and highly talented executive and technical workforce. But they do
more than teach students. They actively encourage their faculty to take what they
know and start companies. They also urge faculty to contribute their talents to
established companies in the area as consultants. These institutions are then
augmented by an excellent and omnipresent community college system for rapidly
assimilating immigrants into the workforce and culture of the Valley. It's a mistake
to see this traffic in knowledge as a one-way street. These excellent schools feed the
firms of the Valley, no doubt. But as I note below, the firms in the Valley also help
feed the ex