Silicon Valley Boom and Bust: Where California’s Tech Mecca Came From, And Why it Always Survives

Though William Shockley’s invention of the transistor is often credited as the seed that grew into Silicon Valley, the roots of the technology industry in Santa Clara Valley go back much further—to a heartbreaking event almost 70 years earlier, when a 15-year-old boy unfortunately contracted typhoid fever and died while on a trip through Europe with his parents. 

The boy was Leland Stanford Jr. The Stanfords were adoring parents who gave their long-awaited only child everything he needed or wanted. When he died, their grief was overwhelming. The Stanfords were determined to give their son a living, permanent memorial. So they founded a university in Palo Alto and named it for the boy. 

But Leland Stanford Sr. wanted this university to be different. For much of the 19th century, “practical” education was considered a separate and somehow lesser endeavor than what the traditional university was supposed to teach—namely, the “liberal arts,” which then meant subjects such as philosophy, Greek, Latin, literature and so forth. Stanford wanted students of his newly founded university to graduate equipped, as he saw it, for the demands of everyday life and for personal success.

To call Leland Sr. and Jane Stanford luminaries of 19th-century California society would be an understatement. Stanford was an industrialist and railroad tycoon—he was a primary investor in the first transcontinental railroad—who was also one of the state’s most prominent political leaders. He served as governor from 1862 to 1863, then as a U. S. Senator from 1885 until 1893, when he died at age 69.

But he was also a grief-stricken father. Leland Jr. was the only child he and Jane were able to conceive and successfully bring into the world, an event that didn’t happen until they had been married 18 years, when Leland was 44 and Jane a few months shy of 40. While 40 years old isn’t a highly unusual age for a first-time mother in the 21st century, in the 19th it seemed nothing short of a miracle.

The elder Stanford never saw anyone graduate from what became known as Stanford University. He died two years after the institution opened its doors. The university's focus on “practical” subjects like engineering and technology, however, produced graduates who would go on to create many of the tech companies that took root in the Santa Clara Valley. Of those graduates, none were more important to the creation of Silicon Valley than Bill Hewlett and David Packard.

The First Garage

According to a widely told tale, Steve Wozniak and Steve Jobs created Apple, the tech firm that would become one of the most profitable corporations in history, in the garage of Jobs’ house in Los Altos. Jobs later claimed that “the garage is a bit of a myth,” and Wozniak said that “the garage didn’t serve much purpose, except it was something for us to feel was our home.” 

Less well-known is the fact that  40 years earlier, in 1938, Hewlett and Packard rented a house at 367 Addison Avenue in Palo Alto specifically for its garage, fully intending to build a technology company. Both had graduated from Stanford in 1934, and both came under the mentorship of Fred Terman, a professor who later rose to become dean of Stanford’s engineering school. 

Terman also started what at the time was a threadbare electronics lab at Stanford, where the young Hewlett and Packard would hang out, trying to figure out how to someday start their own business. Terman not only encouraged them to follow their aspirations but fed them the idea for their first product, an audio oscillator.  

Hewlett and Packard, unlike Jobs and Wozniak, used the garage as a workshop and early corporate headquarters. The duo did all of their research, testing and manufacturing in the garage for at least a year when the success of their new Hewlett Packard Company allowed them to move into a larger facility in 1940. The original HP garage still stands today, preserved as a museum at its original location.

For his mentorship and advocacy of Santa Clara Valley as a home for technology start-up companies, Terman earned the unofficial title, “Father of Silicon Valley.”

Today, Silicon Valley is indisputably the capital of the world’s technology industry, with 39 companies on the Fortune 1000 list headquartered there. A 2021 study found that the Valley is home to almost 7,900 “scaleups,” that is, companies that have raised more than $1 million since their founding—only about 1,300 fewer than the entire continent of Europe.  

Silicon Valley’s dominance over the tech industry appears unassailable, even with a reportedly increasing rate of businesses leaving California. No other region of the country even comes close, and the Valley is well prepared to survive even the dark days that set in the latter months of 2022.

Dark Clouds Over the Valley

As 2022 became 2023, an ominous cloud appeared to loom over Silicon Valley.

Almost as soon as Elon Musk began sending pink slips to 5,000 of Twitter’s 7,500  employees in October of 2022, Mark Zuckerberg—CEO of Facebook’s parent company Meta—said that he would lay off 11,000 employees, about 13 percent of the company’s workforce. Zuckerberg’s grim announcement came less than three years after a hiring spree in which the Menlo Park-based social media colossus took on 13,000 new employees.

In January, Google announced that it would slash 12,000 employees from its payroll, or about six of every hundred people who work for the online search giant.

The initial tech payroll purges were quickly followed by Salesforce, a cloud computing giant that ranks as San Francisco’s largest private employer, dumping 10 percent of its workforce, a total of approximately 7,000 jobs (though not all of the layoffs came in California)—as its CEO Marc Benioff publicly blasted Salesforce employees for supposedly not working hard enough.

The online retail behemoth Amazon announced 18,000 layoffs companywide. Though headquartered in Seattle, Amazon reportedly has about 7,000 Bay Area employees. As of November, 263 of those, slightly under four percent, had been laid off.

Los Gatos-based Netflix, the online streaming entertainment icon, laid off nearly 500 employees in 2022. Flexport, a supply-chain software startup based in San Francisco, announced 640 job cuts, or 20 percent of its workforce, in January 2023. Coinbase, a leading cryptocurrency exchange, slashed about 1,100 jobs in 2022, and as the crypto market continued to collapse, said it would lay off another 950 of its 4,700 remaining staff in 2023. Even the longstanding online payment platform PayPal, co-founded by Musk in 2000, laid off 80 workers in its San Jose headquarters, and dozens more in other states.

The list goes on. According to the site layoffs.fyi, which maintains a database of tech industry job cuts, in the first five weeks of 2023 alone, 57 tech firms worldwide had announced almost 22,000 layoffs, thousands of those in California.

Dark days indeed. And yet, even as widespread industry bloodletting continued, the future of the tech industry did not appear to be in much danger. Despite the layoffs, the three counties that form the heart of what is now considered Silicon Valley—Santa Clara, San Francisco and San Mateo—recorded the lowest unemployment rates in the state, as of January 2023. Tech industry experts remained sanguine, even optimistic, about the future of technology in California.

“The industry obituary has been written prematurely a few times,” Margaret O’Mara, author of the 2019 book The Code: Silicon Valley and the Remaking of America, told the Guardian. “It may be the end of an era for Silicon Valley, but it is unlikely to be the end of Silicon Valley.”

The Valley Before Silicon

Even the ravages of 2022/23’s dizzying layoff spree will certainly not put an end to Silicon Valley. But where did Silicon Valley begin? The Santa Clara Valley, the Northern California region to which the “Silicon Valley” nomenclature was initially applied, extends from just south of the San Francisco Bay, cutting between the East Bay Foothills and the Santa Cruz Mountains. For most of the 20th century, the region was best known not for computers but for orchards. About 30 percent of the world’s French Plums, also called prunes (once they’re dehydrated), came from the rich agricultural region which until relatively recently was known as the “Valley of the Heart’s Delight.” 

The most notable technological innovation to come out of the Valley during that early period—canned fruit. The canning industry was born out of necessity in the late 19th century when the region was producing so much fruit that supply outstripped demand and prices took a plunge. 

Canning began as a way to preserve excess fruit for later sale. As the technology of mass production improved, canned fruit became its own marketing phenomenon. From about 1920 to 1950, roughly 90 percent of the country’s preserved and canned fruit came out of the Santa Clara Valley, with factories based in San Jose.

It was also around 1950—1948 to be exact—that an event occurring 3,000 miles to the east marked the first small step in changing the “Valley of the Heart’s Delight” into the Silicon Valley technopolis that exists today. A cantankerous and generally unpleasant—but undeniably brilliant—physicist at Bell Labs in New Jersey, the above-mentioned William Shockley, invented a device for controlling and amplifying electrical signals: the bipolar transistor. In 1956, the invention would gain Shockley a Nobel Prize, with his collaborators John Bardeen and Walter Brattain. By that time, however, Shockley had already relocated to Palo Alto. 

The Racist Who Gave Rise to Silicon Valley

As brilliant as he was in the field of electronics, he was at least that incompetent and insufferable in the rest of his life. He couldn’t get along with his co-workers at Bell Labs who found him abrasive and arrogant. He divorced his wife though she was in the midst of a battle with cancer, and married a psychiatric nurse. He later denigrated his two children—a son who earned a Stanford Ph.D. and a daughter who graduated from Radcliffe— as representing “a very significant regression” from his own colossal intellectual stature.

He went on to make the grave mistake of assuming that his genius for physics extended to biology, psychology and sociology. Despite his world-changing work on transistors, he considered his true legacy to be his theories of what he called “retrogressive evolution,” which was really just his racist belief that Black people were intellectually inferior to whites.

Shockley never experienced a moment of reckoning for his repugnant views, which dominated the last three decades of his life. Nonetheless, his invention of the transistor revolutionized the Santa Clara Valley and the world. The Palo Alto company he started in 1955, Shockley Semiconductor Laboratory (a transistor is a type of semiconductor), was the first in the valley to design and make the devices that later, after generations of advancement in miniaturization, became known as computer chips. Shockey’s invention still powers everything from iPhones to television sets to cars. He also pioneered the use of silicon to manufacture semiconductors, the process that eventually gave the valley its name.

But grotesque racism was not Shockley’s only flaw. Thanks to his paranoid, tyrannical management, his company didn’t last long and soon several employees broke away to form Fairchild Semiconductor, and eventually dozens more pioneering Silicon Valley firms. 

Silicon Valley Starts to Spread

By the end of the 1960s, the Santa Clara Valley had become a recognized hub of the United States technology industry. Hewlett Packard had moved onward and upward from the Addison Street garage to be a Fortune 500 company listed on the New York Stock Exchange. Aerospace firm and defense contractor Lockheed (later Lockheed Martin) moved to the valley in 1956. Employees of Fairchild Semiconductor went on to start more than 30 technology companies in the region, including Advanced Micro Devices in Sunnyvale, National Semiconductor in Santa Clara, and Applied Materials also in Santa Clara. 

Employees of the numerous Valley-based tech firms, the story goes, had already christened the region “Silicon Valley” in their conversations around the proverbial water cooler. The name was a nod to the elemental substance used since 1954 to manufacture transistors. (Previously, the element germanium was the essential material in transistors.) But the term did not appear in a public medium until 1971.

That’s when Don Hoefler, a reporter for the industry publication Electronics News—a tabloid-sized weekly newspaper considered essential reading for tech execs of that era—had lunch with Ralph Vaerst, founder of Ion Equipment Corp., who casually dropped the water-cooler term into their off-the-record chat. Hoefler, knowing a headline-worthy phrase when he heard one, went back to the Electronics News offices and added the catchy term to an article he’d been working on about the rapid growth of the semiconductor industry in the Santa Clara Valley. 

Published on January 11, 1971, Hoefler’s piece was headlined “Silicon Valley, USA.” The memorable moniker quickly became a synonym not only for Santa Clara Valley but a synecdoche for the entire Northern California technology sector. Today, Silicon Valley companies extend over the entire San Francisco Bay Area, from north and east of San Francisco to the southern city limits of San Jose.

And Then, There Was the Internet

On October 29, 1969, a computer node located at UCLA sent a signal to a second node located at Stanford Research Institute (SRI ) in Menlo Park. Founded by Stanford University in 1946, SRI International is now an independent technology research facility that has lit the sparks to ignite dozens of innovations that have formed the basis for innumerable Silicon Valley businesses, as well as other innovations that have since become ingrained in American, and global, culture. Color television, Light-Emitting Diodes (LED), the digital fax machine, medical ultrasound machines, solar energy cells, and even the 911 emergency number all originated or were developed at SRI.

The brief message sent in 1969 from UCLA to SRI, which consisted of the two letters “LO” (the computer crashed before “LOGIN” could be typed)  may have represented the most world-shaking innovation of all. The message was transmitted through a network called ARPANET, a system allowing computers to communicate with each other over long distances, developed by the U.S. Defense Department’s Advanced Research Projects Agency (ARPA, since revised to DARPA).

Five years after that first ARPANET message, two computer scientists—Benton Kahn and Vinton Cerf—published a paper describing a new “protocol” for sending information across a complex network of computers anywhere in the world. Called Transmission Control Protocol, or TCP, this innovation opened the door to creating an international network of computers that could communicate and instantaneously exchange data. Kahn and Cerf called this international network “the internet.”

Netscape Tames the Internet

Fast forward to 1994, when the Mountain View start-up Netscape introduced a piece of software it called “Navigator,” which most people called “Netscape” anyway. The easily downloadable, free program took the seemingly innumerable, complicated protocols and computer code that made the internet work, and consolidated them into a neat, colorful screen that displayed text in various fonts, as well as graphics, and even, after a few more updates, audio and video (albeit in rather clunky, slow fashion). 

Netscape’s “browser” allowed users to navigate—or in more popular parlance, “surf” a new thing called the World Wide Web. The “web” as it quickly became known, was a network of self-contained “sites” that could be accessed through the internet. Netscape was a great leap forward. Suddenly, the internet was a fun place full of information, entertainment, and inevitably, commerce. Netscape was a portal between the real world and cyberspace.

Most importantly, thanks to the new web browser, the World Wide Web could be accessed by pretty much anyone, with a bare minimum of technical knowledge or none at all. What had previously been a network utilized mainly by academics, the military and a small number of hardcore tech nerds became a mainstream medium of mass communication almost literally overnight. 

When Netscape did its initial public stock offering in 1995 it commanded 90 percent of the web browser market—other browsers looked like lame knockoffs—and saw its stock price double in one day despite the fact that the 16-month-old company had never made a profit, was giving away its core product for free and appeared to have no real plan to generate actual cash. Netscape’s startling, seemingly instantaneous success set off what came to be known as the dot-com bubble.

Boom and Bust in the Valley

Which brings us back to the big tech bust of 2022 and 2023. Why did it happen? The easiest answer is that Silicon Valley has a long history of booming and busting. That history notably includes the boom in home video game systems in the early 1980s, which gave way to the personal computer (PC) boom that took off in 1981, when 1.4 million home computers were sold, half of them in the U.S.

In 1982, that number jumped to three million, with Cupertino-based Apple becoming the first PC maker to top $1 billion in revenue. Like the Netscape-fueled dot com boom that came along in the next decade, the PC boom was fueled by software. Apple in particular offered an operating system—the software used to run the computer itself—that featured a functionality known as a GUI, or graphical user interface. The GUI concept was developed a few years earlier by researchers at Xerox PARC  in Palo Alto. 

Where previously computer users were forced to bravely wrangle their way through seemingly inscrutable text-only lines of code on a hard-to-read black-and-green (or orange) screen, now they could operate their computers with the aid of little pictures or “icons” (the “graphical” part) that they could manipulate with a palm-sized device called a mouse (another innovation of researchers at SRI as far back as the 1960s).

Yet by 1985, the whole computer industry in Silicon Valley fell into what the New York Times called “a severe slump.” No one seemed to be able to ascertain exactly what caused the slump, but according to the Times report, the most likely cause was a boom that just became too big. 

“The computer industry is feeling the pain of its own excesses,” the Times reported. “Too many companies specializing in the same things have been formed, each lured by potential riches and each believing in its own success. In a time that has been widely hailed as the era of the entrepreneur, many people think the computer industry is suffering from the ill effects of entrepreneurialism run amuck.”

Dot Com: Another Big Bust

That same type of overinflated bubble led to the dot com bust of the early 2000s. The phrase “dot com” was yet another creation of SRI researchers who figured out how to organize the internet using addresses that could be typed in more or less plain English rather than a sequence of apparently nonsensical numbers.

The success of Netscape and the browser that eventually knocked it off its perch, Microsoft’s Internet Explorer, unleashed an onslaught of companies doing business on the internet—that is, dot com businesses. Some were existing brick-and-mortar businesses seeking to expand into the virtual world, but many existed only online. In 1999, the value of 199 dot com stocks tracked by researchers at the financial firm Morgan Stanley reached an astonishing $450 billion (that would be over $800 billion in 2023 dollars).

Those 199 companies must have been raking in mouth-watering amounts of profit. Right?

Well, nope. In fact, those 199 dot coms combined to show $6.2 billion in losses. The dot com business no longer showed an interest in making money the old-fashioned way, that is, by creating and selling useful, profitable products. 

Instead, it became all about entrepreneurs jacking up their companies’ stock prices then quickly cashing out with IPOs, becoming multimillionaires literally overnight while their companies, and other investors, too frequently tanked. Needless to say (or at least it should have been needless to say but apparently needed to be said) this business model was not built to last.

By the end of 2001, internet stocks collapsed and more than $1 trillion in wealth invested in dot com companies simply vanished.

The Bust of 2022-2023?

By the end of 2022 it was deja vu all over again. Tech companies watched their stock prices crater as revenues sagged. Apple was the best performer of the big tech firms, losing only 16 percent off its stock price in 2022. Facebook’s parent company Meta watched as $800 billion of its stock market value vaporized, as its stock price dropped a dizzying 75 percent from September of 2021 to the end of October 2022. 

Meta’s fall was quite typical. NASDAQ, the stock exchange that is home to most high-tech stocks, dropped by a cumulative 30 percent in 2022.

What happened this time? Again, no one’s quite sure. One popular theory blames the COVID-19 pandemic, which caused hundreds of millions of people in America and around the world to stay inside their homes for the better part of two years in 2020 and 2021. All of those housebound consumers spent increasingly vast amounts of time online, buying things, absorbing advertising on social media sites, video-chatting on subscription sites such as Zoom, and generally screwing around.

When human beings began to emerge from their shells in 2022, internet businesses took a beating. Or so the theory goes. 

Other factors could include rising interest rates as the U.S. Federal Reserve put a chokehold on the economy in an effort to reduce inflation. Also playing their part were generalized fears that the economy is headed for disaster thanks to such ominous developments as the Ukraine war, media reports (accurate or not) of a looming recession, inflation—which has receded but remains an issue—and overall political uncertainty. 

As of this writing in mid-February, things do not look good. But if the history of Silicon Valley tells us anything, however, is that while California’s tech industry may suffer, it somehow always survives.