Silicon Valley: World Leader in Innovation

By Ken DeLeon, ESQ | Founder

I was invited to an international real estate conference in South America to discuss what factors led to Silicon Valley’s rise, and how it consistently reinvents itself through continual innovation. This article explores what unique factors led to Silicon Valley’s explosive growth. By identifying these, other regions can follow a successful blueprint to build their own innovation centers.

Silicon Valley is a region of worldwide fame that is often emulated, yet has never been successfully replicated. How did this small region grow from humble origins 70 years ago into the economic juggernaut that is now the epicenter of world innovation?

As late as the 1960s, Silicon Valley was primarily an agricultural community, and nearby Stanford was a very good but not yet great university. With the founding of Fairchild Semiconductor and some federal defense spending based in the Valley, a small technology center sprang up, and a cluster of innovative companies began having employees switch from company to company. By the 1980s, Silicon Valley had become America’s second technology hub. However, it was not as large or successful as the “Massachusetts Miracle,” or the many now-defunct technology companies headquartered in Boston and founded by Harvard and MIT alumni, which at the time was an even more potent combination than Stanford and Berkeley. Yet Silicon Valley leapfrogged past Boston to become the predominant worldwide region of innovation due to legal, economic, and cultural differences that showcase the building blocks of Silicon Valley.

In the 1980s, the technology companies of both Boston and Silicon Valley faced strong obstacles. However, Silicon Valley overcame and thrived through adapting, whereas Boston’s companies forever lost their competitive edge. The factors that led these regions to have very different responses to adversity are the reasons that continue to drive Silicon Valley today.

Legal Differences

Massachusetts has a very traditional view of employment law and intellectual property protection. Their trade secret laws were very favorable to employers and, as a result, employees who left one technology firm for another were often successfully sued for stealing the proprietary trade secrets of the original company. When an employee would leave one company for another, this often resulted in trade secret litigation, and verdicts often favored the company from which the employee left. This was a large disincentive for employees moving from company to company, and less ideas were spread.

Conversely, California favors employees from a policy perspective, and it is much harder to effectively sue an employee for misappropriating a trade secret. Consequently, California companies tend to sue less frequently and employees frequently switch from company to company, creating a cross-pollination of ideas that accelerates innovation. Even as trade secret law becomes increasingly litigated under federal laws, California courts are less inclined to favor companies over employees.

Additionally, California is one of only three states that prohibit non-compete clauses for employees. California’s focus on the rights of employees triumphing over employers resulted in Silicon Valley’s free flow of employees among competing companies, and this accelerated insight and innovation.

Economic Differences

The technology companies that once thrived in Boston include Digital Electronic Company, once the world’s second largest computer manufacturer after IBM, and others like Wang, Data General, and Lotus. These companies were organized as large vertical hierarchies with rigid career ladders where change occurred slowly and rarely and came solely from top management. Silicon Valley companies, even as they scaled up in size, are horizontal in management style, and teams move nimbly from project to project. There is not a top-down managerial style as employees are encouraged to innovate and recommend changes.

Within the boom-and-bust cycles of technology, the Japanese started to dominate the semiconductor industry, and the computer industry shifted from mainframe to personal computers. The Massachusetts companies were slow to react. However, Silicon Valley companies regenerated and started with new problems that they could again be the best at solving in the world. While Silicon Valley has had many evolutions, and the focus of the Valley has changed from semiconductors to hardware to software to social networking—and now to platforms like artificial intelligence, virtual reality, and self-driving cars—the focus is always on constant innovation and adaptation to stay ahead of the competition.

The success of Silicon Valley has come with its own set of problems—such as now being one of the most expensive places in the world to do business—but the consensus is that the advantages of being within this thriving ecosystem outweigh the very high costs. Proximity to so much technology and talent expedites the speed of innovation, allowing local companies to both become the first to the market with new products and to quickly adapt to market changes.

Cultural Factors

Any time that you seek to create something new, success is the goal, although failure is the norm. How Silicon Valley both accepts and ultimately embraces failure is one major cultural difference that sets it apart. Whereas the rest of the world generally has the mindset of “Do not fail,” Silicon Valley embraces failure and instead seeks to “Fail fast” and “Fail forward.” Most entrepreneurs and venture capitalists in Silicon Valley expect that nine out of 10 start-ups will fail. But when a start-up such as Google or Facebook succeeds, it provides an exponential return, allowing for continued calculated risk-taking. Throughout the world, failure is viewed as a stigma that often prohibits future funding or even getting another job. In Silicon Valley, failure is viewed as instructional, and entrepreneurs who have failed are viewed as wiser and more experienced.

Many have questioned why Europe, with all of its talented engineers and strong universities, has not produced a Silicon Valley equivalent. A New York Times article entitled “A Fearless Culture Fuels US Tech Giants” points to the stigma towards failure in Europe—and consequent decline in risk-taking—as one of the major reasons for Europe’s lack of innovation relative to Silicon Valley.

The results speak for themselves. American technology companies compose five of the top six most valuable companies in the world, and all of these companies were founded in the last 50 years. These include #1 Apple, #2 Alphabet (Google), #3 Microsoft, #4 Amazon, and #5 Facebook. No European company was ranked in the top 15 most valuable companies in the world. And, of the 10 most valuable companies in Europe, only SAP (#47 worldwide by market cap ranking) was founded in the last 50 years.

Another cultural phenomenon of Silicon Valley is that its companies create platforms instead of products. Most companies or regions focus on making as many products as possible. Silicon Valley companies focus on a platform such as Facebook or Uber and often will never even build a product. While any particular product will have limited applications, a platform presents exponential returns when successful, and can be expanded over time to become large enough to benefit from a network effect.

Silicon Valley is arguably experiencing its own network effect as it is continually viewed as the region where the world’s best and brightest meet to fund and implement their visions to change the world. Residents also provide an ideal testing ground for technology products that are being created. With a diverse and cosmopolitan population, Silicon Valley inhabitants are early adapters, always first to purchase the latest technological innovation and embrace new concepts such as Tesla’s electric car or Google’s self-driving car. Having such an ideal audience to test its products is another advantage that Silicon Valley has.

In a world of increasing chaos and uncertainty, Silicon Valley continues to be a beacon of light and knowledge that successfully navigates an unprecedented journey, providing a roadmap to other regions seeking similar growth and innovation. At DeLeon Realty, we are inspired by our clients to continually innovate, and we are honored to be the top team in the most inventive and creative region in the world.