The synergy of SBIC and defense spending crackled in Palo Alto. A restless Bill Draper spun off from his father’s firm and went into business with an SBIC of his own, recruiting his friend Pitch Johnson to join him. They each scraped up $75,000. Johnson had to go to his father-in-law for most of his share. The government loaned the pair $450,000.12
THE GROUP
By the time Draper and Johnson opened for business in 1962, they had company. The Bay Area was home to many great family fortunes, from timber and agriculture to shipbuilding and coffee, and several of these old-money enterprises jumped into electronics investing. Several San Francisco–based banks and insurance companies also opened SBICs on the side. The fund managers tended to be like Draper and Johnson, well-credentialed strivers in their twenties and thirties, not yet rich themselves, but able to be ambassadors between their generation of young electronics entrepreneurs and their fathers’ generation of bankers and financiers. Over at Bank of America, there was George Quist, who later co-founded one of the tech industry’s most important investment banks. At Fireman’s Fund, there was Reid Dennis.
Although about the same age as his venture peers, Dennis became something of an elder statesman to the burgeoning Bay Area venture community. In 1952, six months after graduating from Stanford with the powerhouse combination of a BS in electrical engineering and an MBA, the San Francisco native had plunged every penny he had left over from his college fund—$15,000—into an investment in local magnetic-tape manufacturer Ampex. He’d seen a demonstration of the technology in an on-campus seminar and thought it looked interesting. It turned out to be far more than that; the investment eventually netted him close to $1 million.
Bow-tied, genial, and meticulously organized (he maintained color-coded day planners throughout his career, archiving them carefully for future reference), Dennis had enough money to quit his day job, but he didn’t. Instead, he began convening regular lunches with other finance folk like him with an appetite for making investments in odd little tech companies down on the Peninsula. Some of the new venturers were scions of wealthy California families; others had been hired to manage the money. They had come of age amid the scientific flurry of the Eisenhower years, making them more attuned than their elders to the shiny new business opportunities in microelectronics, and they ran together in a pack.
Amid the wood paneling and the free-flowing martinis of San Francisco’s clubbiest lunch spots, nervous start-up founders would make their entrepreneurial pitch before the group. Afterward, the investors would send the entrepreneur outside to cool his heels on the sidewalk while they debated whether to opt into the deal. “Sometimes,” remembered Dennis, “we would get $100,000 committed over coffee.” They had a remarkable hit rate. Of the first 25 investments made by the lunch bunch, 20 were successful. They only lost money on 3. “There was no competition” for what they were doing in the Valley, remembered Dennis. He and his lunchtime comrades called themselves The Group. Others called them The Boys Club.13
While growing to enormous size in later decades, the Silicon Valley venture industry budged very little from the all-male, all-white, upper-middle-class demographics that it had at its start. That this homogeneity was its starting point is little surprise. “The West Coast venture group,” reported Pitch Johnson to an inquiring politician a couple of decades later, “is pretty much an engineers and MBAs combination.” Women couldn’t even enter most programs in those two fields in the 1950s and 1960s. Less than three percent of African American men had completed college or graduate school in 1960, in any field; only a handful of nonwhite students could be found in the nation’s top MBA programs.14
The women “computers” who’d programmed the earliest mainframes had left the building, often to raise young families. When and if they wanted to get back into the work after a few years, they’d find that their skills were already two or three tech generations out of date. Hardware and software moved too fast to accommodate an intermission for parenthood.
The rare female technical experts who’d stuck with it, like Ann Hardy, were pretty much invisible to the investors who scouted labs and companies looking for someone who’d make a good CEO. As if to underscore the point, some of the places The Group met for lunch didn’t allow women into their dining rooms.15
Why did these patterns persist, even as women and minorities made significant inroads into other professional domains? The explanation lies with the characteristic of the Valley VC community that set it apart from other regions, and that made it so good at finding and nurturing one generation of entrepreneurs after another: its personal, tightly networked nature.
Just like the broader Valley tech community, the region’s first VC generation consisted of men who were alike in age, education, and temperament. They were friends as well as colleagues and competitors; they chose their investments based on gut instinct as well as more traditional metrics. Much later, one of the region’s most successful and influential VCs, John Doerr, got in hot water after admitting that a major factor guiding his decisions was “pattern recognition.” The most successful entrepreneurs, he found, “all seem to be white, male, nerds who’ve dropped out of Harvard or Stanford and they absolutely have no social life. So when I see that pattern coming in,” he concluded, “it was very easy to decide to invest.”16
The entrepreneurs of the 1960s might not have been college dropouts in jeans and hoodies, but they, too, fit a pattern: engineering degrees from certain programs, some service in the military, conservative in their bearing and their politics, and utterly consumed and fascinated by technical challenges. They were, in fact, much like the venture capitalists who financed them. The mind-meld between entrepreneur and VC was both Silicon Valley’s great advantage and its greatest weakness.
THE ENGINEERS JUMP IN
The SBIC program may have provided the money and fresh talent the venture business needed to scale up, but it proved in the long run to be a bad fit for the kind of venture investing that the Valley needed. Alarmed by the suck on the U.S. Treasury—unsurprisingly, the SBIC never got back all the money it so generously loaned out—Congress loaded down the program with additional regulations and fewer giveaways, cramping the style of freewheeling fund managers. As time went on and the venture community grew, a number of investors who began with SBICs moved to the limited partnership model. Some never bothered with SBICs in the first place.
That was the case with Fairchild’s original power broker, Arthur Rock. Sensing that the future lay in West Coast electronics, he departed Wall Street for San Francisco in 1961, and soon persuaded his friend Thomas J. Davis to partner up with him. Barely forty, Tommy Davis was a seasoned investor who’d already had a remarkable and varied career: law school, wartime service as an OSS spy in South China jungles, then out West to manage money for a California oil-and-cattle empire.17
Dissatisfied with his bosses’ conservative approach to investing, Davis jumped at the chance to partner with Rock. The two had the same people-driven priorities— “back the right people” remained Rock’s mantra—and very soon found themselves financing one of the biggest hits of the 1960s, founded by a distinctly quirky “right person”: Max Palevsky and his scientific computer company, SDS. The deal was a fantastic one for Davis & Rock, as a cash-hungry Palevsky gave away most of his company to his investors in exchange for seed funding. When SDS was acquired by copy-machine giant Xerox in 1968, the partners got a more than $60 million return on their $250,000 investment.18
As the deals got richer, more people got into the venture capital business. This included big players beyond California, notably an affable and stupendously hard-working Chicagoan named Ned Heizer, who raised over $80 million to start a venture fund as Wall Street boomed, putting stakes in everything from supermarkets to semiconductors. Big funds like Heizer’s were unheard-of in the Valley, however. The first generation of electronics pioneers were only starting to see their returns, and the vast majority of America�
��s wealth clustered in the Northeast Corridor.19
Although the Valley wouldn’t fully reap the rewards for another decade, the relatively modest scale of its venture operations kept VCs close to their companies, their entrepreneurs, and emerging technological trends in ways that were impossible for the Ned Heizers of the world. This only increased when a new wave joined the scene in the late 1960s, drawn from that great 1950s surge of migrants who had filled the labs of Lockheed and Sylvania and the classrooms of Stanford. They were operators and technologists, bringing a tacit understanding of the electronics business that was immensely valuable in a fast-changing and intensely competitive business environment. One of them was Burt McMurtry.
In twelve years in the Valley, the low-key Texan had risen from junior engineer to doctorate-holding director of a lab that employed 500 people. He was as loyal as ever to his Houston roots, making an annual pilgrimage to Rice each year to recruit its engineering graduates. The “Rice Mafia” he helped create in the Valley was the biggest concentration of alumni anywhere outside Texas. But California was now home, its sunshine and energy matching McMurtry’s innate optimism and enthusiasm for new high-tech challenges. As venture funds proliferated and the industry diversified, the idea of going to a “funny little company” no longer seemed as far-fetched.20
One of those doing something different was another Valley veteran, Jack Melchor. After a long career at two successful start-ups, the second of which was acquired by HP, Melchor had started to worry about his health. Dave Packard, his mentor and boss, was such a hard worker that he’d developed a twitch; Melchor, too, had worn himself out so thoroughly that he ended up hyperventilating one day in the office and had to be wheeled out under oxygen. That’s all it took for him to depart HP for the slightly less taxing world of investing. “Why don’t you come join me?” he asked McMurtry. The two didn’t know each other well, but Melchor had heard good things. McMurtry reckoned that this “was too good an opportunity to pass up.”21
Incorporating as the Palo Alto Investment Company, the two-man operation set up shop in a second-floor apartment above a pizza parlor. Every night at 6:00 p.m., a giant silent-movie-theater organ installed in the restaurant roared into operation, sending him scurrying out of the office in search of peace and quiet. “Deedee says it’s the earliest I ever came home, before or since.” In four years, he and Melchor invested in sixteen start-ups, never putting more than $300,000 into any of them. Compared to some of the big funds brewing back East, it was small stuff. But it turned out to be the start of one of the Valley’s most storied VC careers.22
GALAPAGOS
The venture capital industry was a critical part of the distinctive, tech-supporting Valley ecosystem that coalesced over the 1960s—but only one part.
Another piece was law. While Draper and Johnson were trolling the orchards and Dennis was presiding over lunchtime pitch meetings, a four-man Palo Alto law office began to offer up services to young high-tech entrepreneurs and venture capitalists. McCloskey, Wilson, & Mosher was a partnership formed by three men who—like so many of their clients—had tired of the corporate scene and were ready to “take some risks,” as co-founder John Wilson later put it. Wilson, the Yale-trained son of an Akron rubber-industry executive, had first come to California as a navy pilot during World War II. Stationed at Moffett Field in Sunnyvale, he’d been smitten by “the golden hills and the majestic oaks” and returned as soon as he could. His partner Paul “Pete” McCloskey was a Golden State native, a Stanford alum, and a Korean War veteran who had led six bayonet charges and earned two Purple Hearts, the Silver Star, and the Navy Cross. Both men were a little overqualified to become small-town lawyers, but Palo Alto was no longer an ordinary small town.23
Within a few years of its 1961 founding, the firm had developed a reputation for the close support it provided to clients, and for its growing expertise in the very particular needs of small electronics companies, from incorporation to patents to personnel. They also stepped in as high-profile advocates in fights that mattered to the community at large, as when McCloskey represented the bucolic and horsey town of Woodside—where he and many electronics-industry executives lived—in its fight to prevent the Atomic Energy Commission from stringing large overhead electrical lines across town. Ironically, the wires’ destination was a facility that had helped make the Valley’s high-tech reputation: the power-hungry Stanford Linear Accelerator.
By 1967, McCloskey would use that elevated public profile to run successfully for Congress. The crowded field that McCloskey vanquished in the Republican primary in this special election included Bill Draper, who’d decided to indulge a long-brewing political urge, as well as the GOP’s favored candidate, Shirley Temple Black, the child movie superstar turned suburban homemaker. The race ultimately came down to Black versus McCloskey, and the lawyer’s surprising victory became known as “the torpedoing of the Good Ship Lollipop.”24
McCloskey’s departure for Capitol Hill left a partnership spot at the firm, soon filled by a young Berkeley law graduate named Larry Sonsini. With Sonsini’s arrival, the small-town firm began to sharpen its distinctive, only-in-Northern-California model for high-tech law practice. The newly renamed Wilson Sonsini Goodrich & Rosati was a law firm with the hands-on, multitasking style of a Valley venture capitalist. The partners worked closely with VCs from a company’s start, delivering advice tailored to the needs of an enterprise with little cash on hand. They layered on new sorts of specialists—not just lawyers who understood different aspects of corporate and securities law, but also science PhDs who understood technology and its commercialization. Over time, Sonsini became increasingly interested in helping clients raise money once they outgrew the early stage: tapping into institutional investors, helping companies go public.25
The model endured over Silicon Valley’s subsequent tech generations. “Lawyers prided themselves on matching the culture,” reflected attorney Roberta Katz, who came to the Valley much later as general counsel for Web-era superstar Netscape. “There was a sense of needing to be nimble and quick and not burdened by too much bureaucratic overhead.” Move fast, and do what it takes to get deals done: law became another place of increasing divergence between Boston and California. Among other things, Massachusetts placed strict limits on lawyers entering into business transactions with clients—such as the Valley practice of taking stock options instead of cash payment for legal fees—dampening the capacity of Boston start-ups to obtain high-priced legal counsel. (Decades later, some Valley insiders credited Sonsini as the original progenitor of an oft-repeated saying about the way the place worked: “no conflict, no interest.”) As tech offerings became particularly hot property in the 1960s stock market, the Bay Area became home to a new cadre of investment banks that blurred the lines between venture, law, and brokerage in similar ways. But it started with the lawyers.26
A second, only-in-the-Valley species: high-tech real estate developers. Suburban Boston was a crowded landscape of colonial villages and nineteenth-century mill towns, with increasingly strict rules about where new homes and office parks might be built. In contrast, the Santa Clara Valley had vast tracts of land at the ready for large-scale industrial development—and a group of landowners who were willing to sell at the right price. During Spanish and Mexican rule, Northern California’s countryside had been divvied up into very large land grants, or ranchos. Many of these big holdings remained intact or only moderately subdivided into the twentieth century, making it remarkably easy to develop large swaths of acreage at once. Land had been dirt cheap in the Valley for decades, and few farmers could resist the lure of cashing out to developers as the electronics market heated up.
More and more flowering orchards gave way to bulldozers, as developers rolled in and promptly erected “tilt-ups”—low-rise industrial buildings made of slabs of prefabricated concrete. No one was winning any architectural awards, but the Valley’s ability to quickly meet market demand was yet
another reason it was able to grow so quickly.
Kings of the bulldozers were Richard Peery and John Arrillaga, who had the great foresight to head out into the orchards at the same time as Draper and Johnson. Instead of funding companies, their goal was to buy up land and turn it into office parks. Arrillaga grew up poor in Los Angeles and attended Stanford on a basketball scholarship, playing professionally for a bit before returning to Palo Alto. There he met Peery, a hometown boy with a fierce entrepreneurial streak, and the two pooled $2,000 of their own money to start buying up orchards in the cheap flatlands around San Jose. The two weren’t alone. Mother-and-son pair Ann and John Sobrato began similar speculative development with the proceeds gained from selling a family restaurant; by the end of the 1960s they were building hundreds of tilt-ups and were—like Arrillaga and Peery—on their way to becoming some of the wealthiest people in the Valley.27
Lightning-quick real estate development benefitted not only from the legacy of the ranchos, but also from a host of other special regional circumstances. There was the extensive water and sewage infrastructure built by San Jose under the watch of an exceedingly ambitious city manager who didn’t worry too much about obtaining permits before building anything, and that allowed the city to build out quickly as a bedroom community for all the engineers flocking to the Valley to work. There was cheap electricity, negotiated during and just after World War II by local governments as a play to build up the industrial base. It fueled not only the mass manufacture of sand into silicon glass but also the fabrication of the chips themselves. Then there were the highways—public investment in the 1950s and 1960s that widened U.S. 101 on the Bay side of the Valley and built a new interstate, I-280, along the coastal hills.28
Last, but hardly least, there was the California factor. The men leading the state during this explosive period of growth—Republican Governor Earl Warren, Democratic Governor Pat Brown—led the way in building not only highways for the cars and sewers for the split-level homes, but also a public education system of unparalleled excellence. Well-resourced and rapidly expanding, California’s public schools educated the children of white-collar Lockheed engineers and blue-collar assembly line workers alike, sending an increasing portion of them on to California’s growing higher education system, which added on three new campuses in the 1960s. Tuition for in-state residents—including at the University of California, Berkeley, one of the very best universities in the world—cost next to nothing.29
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