The Code

by Margaret O'Mara

  Cities that had been pining away for some of Silicon Valley’s magic thrilled at the opportunities the new era presented, sponsoring makerspaces and demo days and holding seminars on how to lure in more venture investment. While the list of places with viable high-tech clusters expanded, however, high-tech investors remained firmly concentrated in the same places they had been in the 1980s. Urban theorist Richard Florida, whose widely read work on the “creative class” fueled cities’ high-tech hopes, found that San Francisco and Silicon Valley firms together accounted for over 40 percent of the VC investments and over 30 percent of the deals made nationally in 2013. Seattle came in at a feeble seventh place. Start-ups were blossoming in the home of Gates and Bezos, but it was too easy to fly down to Sand Hill Road to raise money. “There are vanishingly few growth capital sources for tech innovation that don’t flow through San Francisco and New York,” one Seattle investor observed in frustration.5

  Despite the homegrown hackathons and co-working spaces and incubators sprouting up in cities large and small, the wealth and personnel of the innovation economy were increasingly monopolized by five companies: Amazon, Apple, Facebook, Google, and Microsoft. Soon, it became clear that the surest way for a company to make money in the world of the new titans was to be acquired by one of them. By mid-2018, Facebook had made 67 acquisitions, Amazon had made 91, and Google had made 214. Valley veterans were baffled by the rush to the exits. “Doesn’t anyone want to build a company anymore?” Regis McKenna wondered. The tech business long had been about elbowing out your competition to grab market share. Now, the game became one of building a platform so unique and so dominant that it was the market.6

  The concentration of wealth rippled out into real estate too. Tech’s biggest companies abandoned spec buildings and dun-colored tilt-ups for dazzling, custom-built urban and suburban campuses. Facebook converted the old Sun Microsystems campus in Menlo Park into a spectacular complex rivaling only the Googleplex in its playfulness and perks, with an open interior courtyard that was like Palo Alto’s University Avenue in miniature, except that you never had to find a place to park your car, and all the food and beverages were free. In 2015, the company opened an enormous, Frank Gehry–designed building across the street, designed to be what Mark Zuckerberg called “the perfect engineering space” and to tell a story. “We want our space to feel like a work in progress,” Zuckerberg wrote. “When you enter our buildings, we want you to feel how much left there is to be done in our mission to connect the world.”7

  Even stripped-down Amazon couldn’t resist adding a grand architectural flourish to the generally undistinguished set of buildings that made up its headquarters in central Seattle, building a striking pair of “biospheres” housing indoor gardens for Amazonians to enjoy. On the other side of Lake Washington, Microsoft tried to keep up with its crosstown rival’s riff on Buckminster Fuller by building treehouses for employees’ midday retreats. But the most stunning monument of them all was Apple’s massive new Cupertino headquarters, a sleek ring of glass and steel housing twelve thousand employees. “Apple Park” had been one of Steve Jobs’s last ideas before he died. In homage to their founder and the Valley that once was, Apple planted an apricot orchard in the building’s shadow.8

  THE NEW MONEY MEN

  The Silicon Valley money machine seemed unstoppable. Within a few years of Google’s IPO, a thousand of its current or former employees had a net worth of $5 million or more, including the in-house massage therapist the founders hired back in 1999. Page and Brin were worth about $20 billion apiece. The dot-com kings of the 1990s who reinvented themselves as angel investors and venture capitalists saw their net worth climb. At the head of the pack was Marc Andreessen, who in 2009 founded a new-style VC firm with partner Ben Horowitz designed to nurture young technical founders into savvy company leaders, rather than shoving them aside to bring in adult supervision. Mark Zuckerberg was a perfect example of how it could be done. “The Valley’s fearlessness is coming back,” Andreessen told a reporter.9

  Also coming back: the star analysts of 1990s Wall Street. Mary Meeker had never flagged in her faith in the Internet, even amid the plunging prices and shareholder lawsuits of the dot-com bust. Nor had Ruth Porat, who surged to the top of the technology-banking ranks after taking Google public in 2004. Nine years later, Porat made even bigger headlines by moving to Google to become its CFO. Meeker already had moved to California by then, too, departing Morgan Stanley in late 2010 to become a partner at Kleiner Perkins, bringing along her now-legendary annual slideshow on Internet trends. Meeker was bullish once more, and it wasn’t empty hype: the new generation of companies had better fundamentals, the market had matured, and the people operating and investing in them better understood what it took to make an Internet-based business succeed.10

  The sages of Wall Street moved west, and the relationship between the Street and the Valley changed too. To help the economy recover from the housing bust and deep recession of 2008, the Federal Reserve had kept interest rates low, pumping liquidity into the market and leaving the monied classes looking for high-yield places to put their cash. The abundance and variety of investment capital—private equity, hedge funds, angels—lessened the need for IPOs in a company’s early stages and increased SEC scrutiny of public companies further dampened start-ups’ enthusiasm for a Wall Street offering. Overseas investment by the world’s new mega-rich became another growing source of capital, particularly useful in the shaky days after the 2008 market crash. A cash-hungry Facebook entered into a lucrative deal in May 2009 with Russian financier Yuri Milner, a billionaire with close Kremlin ties; Milner ultimately ended up holding close to 9 percent of the company. “A number of firms approached us,” Mark Zuckerberg said at the time, “but [Milner’s] stood out because of the global perspective they bring.” The Russian also made a large investment in Twitter.11

  Lurking behind all of this cash, domestic and foreign, was the angel that had been there since the very beginning: the U.S. government. American financiers had so much to invest because of a U.S. tax code that—thanks to five decades of sustained lobbying—strongly advantaged those who made money from money. The capital gains tax stood at 15 percent. The carried-interest deduction stood firm, despite periodic attempts to abolish it. VCs, hedge fund managers, and private equity funds alike were able to rake in billions for managing other people’s investments, and call all of it their “capital gains.”

  Then there were the taxes on corporate revenue. For more than fifty years, the U.S. had allowed American corporations operating overseas to defer taxation on profits earned in non-U.S. markets. In the early 2010s, this arrangement became a gold mine for software companies, which, because of their global reach and the ethereal nature of their product, were able to shift profits from high- to low-tax jurisdictions. (The United States, as tech giants and others would continually point out in their defense, had the second-highest corporate tax rate in the world.) Tech firms further reduced their tax bills by writing off stock options, depreciation of facilities, and expenditures on R&D.

  The elaborate shell game—entirely permissible under IRS rules—made rich companies like Apple, Google, and Amazon even richer. Washington made spasmodic efforts to change the system in the Obama years, but it was hard to cast beloved tech brands as tax-dodging fat cats. “I love Apple!” rhapsodized Missouri Democrat Claire McCaskill at a 2013 Senate hearing where Tim Cook was supposedly being called to account for his company’s creative accounting. Kentucky Republican Rand Paul berated his fellow Senators for “bullying” Cook and a company that was “one of America’s greatest success stories.”12

  Facebook employees and alumni also joined the ranks of the breathtakingly wealthy. Napster co-founder and early Facebook leader Sean Parker became something of a latter-day Jerry Sanders, making headlines for the conspicuous consumption of the billions he had reaped from Facebook’s 2012 IPO. Parker’s wedding the following year in a Big Sur redwood fores
t was an homage to Silicon Valley’s favorite fantasist, J. R. R. Tolkien, featuring custom-made medieval costumes for more than 350 wedding guests, a faux castle, and, as Facebook chronicler David Kirkpatrick reported, “a pen of bunnies . . . for anyone who needed a cuddle.” Toward the end of the evening, Sting performed a cappella.13

  The combination of Facebook stock and savvy investments in other Valley start-ups also made Chamath Palihapitiya a billionaire, and he co-founded a new venture operation called Social+Capital (later dropping the +). It was VC, Chamath-style, made possible by the immense amount of personal wealth generated in the Valley since 2000. Limited partners included not only outside investors but also a hand-picked group of very rich friends and one very rich corporation: Facebook. The goal was not only to further leverage the connective power of social platforms, but also to support a more diverse pool of entrepreneurs and build a “purpose-driven” portfolio.

  Yet even in this new era of VC, the Valley’s tight networks of friendship and familiarity still ruled: Social+Capital’s first investment was in Yammer, a social network for business use, founded and led by Diversity Myth author-turned PayPal millionaire David Sacks. Palihapitiya became an observer on Yammer’s board, whose members included Peter Thiel and Sean Parker.14

  The new generation of money men wore designer T-shirts instead of sport coats, drove Teslas instead of Mercedes, and used rap lyrics as business metaphors. They had more flash and cash than their VC forebears, but the same relentlessness, elbowing past slower-moving East Coast competition to latch on to early-stage deals. They were brilliant and lucky, and they knew it. “This is not checkers,” Ben Horowitz advised would-be entrepreneurs. “This is motherfuckin’ chess.”15

  AN INCONVENIENT TRUTH

  Among those made very wealthy in this era: Al Gore, who already was living one of the more extraordinary afterlives in American political history. Gore had first turned media mogul, embarking on a cable news venture called Current TV. He then had gained fame as a bearded prophet of climate change after a 2006 documentary in which he starred, An Inconvenient Truth, became an Oscar-winning smash. But it was his next act as a Silicon Valley advisor and venture capitalist that turned him into a multimillionaire.

  Gore had hit the jackpot with his early stake in Google, and his net worth soared even higher after a few years on the board of Apple, which he joined in 2003. Four years later, the iPhone was a smash, the former veep was worth $100 million, and he accepted John Doerr’s invitation to become a partner at Kleiner Perkins. The politician mocked for his earnest and robotic mien, who had longed for and very nearly achieved the presidency, had at last found his niche. “For whatever reason,” he reflected to a reporter, “the business world rewards a long-term perspective more than the political world does.”16

  Doerr’s decision to bring on Gore as a partner was motivated not only by friendship and politics. It was a business decision as well. Kleiner had exited the 1990s boom as one of the Valley’s biggest names, and its investments in Google and Amazon had bolstered its portfolio as the 2000s began. Doerr was ready for a next act, and he was thinking bigger: not just consumer software, but global “grand challenges” that might, under the right conditions, provide huge market opportunity. Alternative energy—green tech—was the biggest challenge and opportunity of them all.

  Like many others who saw Gore’s An Inconvenient Truth, Doerr had become increasingly worried about the consequences of untrammeled consumption of fossil fuels. As he tooled around the Valley in his new Toyota Prius, Doerr realized that rising energy prices and turmoil in the Middle East were going to soon force a policy tipping point. The George W. Bush administration might be stocked with oil and gas men, but some limitations on carbon emissions and new renewable-energy mandates seemed unavoidable. Here was the public-sector push that the green-tech sector needed: just like with the integrated circuit and the Apollo program, government spending would allow an expensive and cutting-edge product to scale to market-altering proportions.

  In the spring of 2007, Doerr went public with his new crusade, giving a heart-on-his-sleeve TED talk titled “Salvation (and profit) in greentech.” The industry “is bigger than the Internet,” he declared. “It could be the biggest opportunity of the twenty-first century.” By November, Gore was talking an even bigger game about its potential impact. “What we are going to have to put in place is a combination of the Manhattan Project, the Apollo project, and the Marshall Plan,” the former veep explained. “It’d be promising too much to say we can do it on our own, but we intend to do our part.”17

  By 2008, the Gore-Doerr team was again in full swing, lobbying the Bush Administration and encouraging presidential candidates to move forward on environmental treaties and other measures to reduce carbon emissions. By the fall, Kleiner’s billion-dollar green-tech fund had backed forty different companies, and hundreds more entrepreneurs trekked to Sand Hill Road to deliver their pitches. Obama’s election was a thrilling victory for the green team. An eco-friendly Democrat was back in the White House at last. The crash of the housing market that autumn was a setback, but Obama was promising a hefty infrastructure and spending program to bring the economy back—what better time to be building solar panels or developing electric cars?18

  John Doerr always thought five years ahead, but this time politics made him fifteen or twenty years too early. Facing stiff opposition in a Republican-led Congress, Obama’s big-spending stimulus plan was not as massive or market-disrupting as originally hoped. Carbon pricing went nowhere. Then the rapid scaling up of a different technological breakthrough transformed the economics of the U.S. energy market, and it wasn’t green in the least. Most significantly of all, hydraulic fracking—which involved the high-velocity injection of millions of gallons of liquid into bedrock to release the natural gas within—vastly increased domestic energy production and drove down prices, taking away the market incentives to use alternative fuels.

  On top of this came the cable-news-stoked political scandal of Solyndra, a solar energy company that collapsed after receiving $500 million in federal subsidies. (As staggering as the sum appeared, it was small potatoes in the world of green energy. Elon Musk’s various ventures together received close to $5 billion in government subsidies by 2015.) Under fire, the Obama Administration scaled back their ambitions for a green-tech future, and Kleiner did as well.19

  Doerr and Gore had made a gamble that fell far short of its promise, even though in another, less divided and less austerity-minded political moment it might have indeed been another successful moon shot. While Kleiner remained one of the Valley’s biggest players, the firm’s focus on alternative energy had come at the cost of missed opportunities in social and mobile, despite the fact that it had beefed up its consumer-Internet credentials by hiring on Mary Meeker. Then Doerr and his firm were hit by even worse news: a junior partner named Ellen Pao filed a sex bias suit against the company in the spring of 2012.

  Doerr was extremely close to Pao. He had brought her into the firm as his chief of staff and remained her mentor and internal champion ever since. She was part of “Team JD,” and her accusations that the firm was a hostile old-boys’ club were a cutting personal blow. Over the previous decade, alarmed at the small numbers of women in venture investing, Doerr had pushed hard to recruit and promote women at Kleiner. “It is not easy to stand by as false allegations are asserted against the firm,” Doerr wrote on the company’s website soon after Pao filed her suit.20

  The lawsuit and its attendant scandal dragged on for three more years, precipitating significant public discussion and soul-searching about the industry’s endemic gender imbalances for the first time in Silicon Valley history. Kleiner’s male-dominated culture was on trial, and so was that of the entire VC industry, a place where only 8 percent of investing partners were women and less than 5 percent of venture-backed companies had female founders.21

  The low numbers weren’t all that different f
rom those of the rest of corporate America, the Valley’s defenders would counter, where a comparably feeble percentage of Fortune 500 CEOs were women. But that argument didn’t fly very far in the swelling public debate, and when the largest companies very reluctantly released data about the numbers of women and underrepresented minorities on their payrolls, the news went from bad to worse. Across the industry, women held only about 20 percent of technical roles. The percentage of women in computer science had been going down since the 1980s.22

  Doerr agonized over what he could have done differently in Ellen Pao’s case, he told author Emily Chang, feeling that if he had promoted his protégé earlier, “I don’t think we would have gone through the trial.” Pao lost her case in May of 2015, and while his allies publicly exulted at the win, Doerr was far more subdued. Coming right on the heels of green tech’s challenges, the lawsuit had taken an obvious emotional and professional toll. While remaining Kleiner’s chairman, he stepped back from active investing the following year. It was time for other masters of the universe to take over.23