text: thought different

Business

The Purpose of Silicon Valley

Capital and engineering talent have been flocking to seemingly trivial mobile apps. But would we really be better off if more startups instead went directly after big problems?

San Francisco and Silicon Valley account for half of all venture investment in the United States.

The view from Mike Steep’s office on Palo Alto’s Coyote Hill is one of the greatest in Silicon Valley.

Beyond the black and rosewood office furniture, the two large computer monitors, and three Indonesian artifacts to ward off evil spirits, Steep looks out onto a panorama stretching from Redwood City to Santa Clara. This is the historic Silicon Valley, the birthplace of Hewlett-Packard and Fairchild Semiconductor, Intel and Atari, Netscape and Google. This is the home of innovations that have shaped the modern world. So is Steep’s employer: Xerox’s Palo Alto Research Center, or PARC, where personal computing and key computer-­networking technologies were invented, and where he is senior vice president of global business operations.

And yet Mike Steep is disappointed at what he sees out the windows.

“I see a community that acts like it knows where it’s going, but that seems to have its head in the sand,” he says. He gestures toward the Hewlett-Packard headquarters a few blocks away and Hoover Tower at Stanford University. “This town used to think big—the integrated circuit, personal computers, the Internet. Are we really leveraging all that intellectual power and creativity creating Instagram and dating apps? Is this truly going to change the world?”

After spending years at Microsoft, HP, and Apple, Steep joined PARC in 2013 to help the legendary ideas factory better capitalize on its work. As part of the job, he travels around the world visiting R&D executives in dozens of big companies, and increasingly he worries that the Valley will become irrelevant to them. Steep is one of 22 tech executives on a board the mayor of London set up to promote a “smart city”; they advise officials on how to allocate hundreds of millions of pounds for projects that would combine physical infrastructure such as new high-speed rail with sensors, databases, and analytics. “I know for a fact that China and an array of other countries are chasing this project, which will be the template for scores of similar big-city infrastructure projects around the world in years to come,” Steep says. “From the U.S.? IBM. From Silicon Valley? Many in England ask if anyone here has even heard of the London subway project. That’s unbelievable. Why don’t we leverage opportunities like this here in the Valley?”

Steep isn’t alone in asking whether Silicon Valley is devoting far too many resources to easy opportunities in mobile apps and social media at the expense of attacking bigger problems in energy, medicine, and transportation (see Q&A: Peter Thiel). But if you put that argument to many investors and technologists here, you get a reasonable comeback: has Silicon Valley really ever set out to directly address big problems? In fact, the classic Valley approach has been to size up which technologies it can quickly and ambitiously advance, and then let the world make of them what it will. That is how we got Facebook and Google, and it’s why the Valley’s clean-tech affair was a short-lived mismatch. And as many people point out with classic Silicon Valley confidence, the kind of work that made the area great is still going on in abundance.

The next wave

A small group of executives, surrounded by hundreds of bottles of wine, sit in the private dining room at Bella Vita, an Italian restaurant in Los Altos’s picturesque downtown of expensive tiny shops. Within a few miles, one can find the site of the original Fairchild Semiconductor, Steve Jobs’s house, and the saloon where Nolan Bushnell set up the first Atari game. The host of this gathering is Carl Guardino, CEO of the Silicon Valley Leadership Group, an industry association dedicated to the economic health of the Valley. The 400 organizations that belong to the group are mostly companies that were founded long before the mobile-app craze; only 10 percent are startups. That is evident at this dinner, to which Guardino has invited three of his board members: Steve Berglund, CEO of Trimble, a maker of GPS equipment; Tom Werner, CEO of the solar provider SunPower; and Greg Becker, CEO of Silicon Valley Bank.

These are people who, like Steep, spend much of their time meeting with people in governments and other companies. Asked whether the Valley is falling out of touch with what the world really needs, each disagrees, vehemently. They are almost surprised by the question. “This is the most adaptive and flexible business community on the planet,” says Becker. “It is always about innovation—and going where the opportunity leads next. If you’re worried that the Valley is overpursuing one market or another, then just wait a while and it will change direction again. That’s what we are all about.”

“This is the center of world capitalism, and capitalism is always in flux,” Werner adds. “Are there too many social-­networking and app companies out there right now? Probably. But what makes you think it’s going to stay that way for long? We have always undergone corrections. It’s the nature of who we are … But we’ll come out stronger than ever, and in a whole different set of markets and new technologies. This will still be the best place on the planet for innovation.”

Berglund contends that a generational change already under way will reduce the emphasis on apps. “Young people don’t seem to care as much about code as their generational elders,” he says. “They want to build things—stuff like robots and drones. Just go to the Maker Faire and watch them. They’re going to take this valley in a whole different direction.”

Berglund could be right. In the first half of 2014, according to CB Insights, Internet startups were the leading recipient of venture investment in San Francisco and Silicon Valley (the area got half of the U.S. total; New York was second at 10 percent). But investment in the Internet sector accounted for 59 percent of the total, down from a peak of 68 percent in 2011.

Doug Henton, who heads the consulting firm Collaborative Economics and oversaw an upcoming research report on the state of the Valley, argues that since 1950 the area has experienced five technological waves. Each has lasted about 10 to 20 years and encompassed a frenzy followed by a crash and shakeout and then a mature “deployment period.” Henton has identified these waves as defense (1950s and 1960s), integrated circuits (1960s and 1970s), personal computers (1970s and 1980s), Internet (1990s), and social media (2000s and 2010s). By these lights, the social-media wave, however dominant it is in the public eye, soon may be replaced by another wave. Henton suggests that it’s likely to involve the combination of software, hardware, and sensors in wearable devices and the “Internet of things.”

Low-hanging fruit

Floyd Kvamme began his career at Fairchild Semiconductor (he was in a meeting with Gordon Moore and Andy Grove when an executive burst in to announce that John F. Kennedy had been assassinated), led the mainframe computer program at National Semiconductor, and then became a successful venture capitalist at Kleiner Perkins ­Caufield & Byers. Before he retired in 2009 to become an angel investor, he spent eight years as cochair of the President’s Council of Advisors on Science and Technology.

To him, whether Silicon Valley should solve bigger problems is a misguided question because it’s already solving them indirectly. “The world’s attention is always distracted by the newest big companies in the Valley,” says Kvamme, “but the reality is one of ubiquity. The fact is that the Valley is into everything these days. Why? Because even after all these years, it still comes down to the silicon—and not just processors or memory but sensors, and most of all, because everything is mobile now, power integration and management.

“I don’t think people appreciate the miracle that’s taken place over the last decade. In 2005 [the Council of Advisors] did an energy report that determined that the U.S. was consuming 100 quadrillion BTUs of energy each year. We forecast that by 2030, the demand would grow to 150 quads. Instead, [in 2013] the U.S. only consumed 98 quads. How was this accomplished? By improved power control—and the low-hanging fruit was efficiency at the silicon and application level, Silicon Valley’s strengths. Almost without the world noticing, efficient processors are showing up everywhere.”

Such combinations of improvements in hardware and software lead to many technologies that are extremely valuable even if they get less attention than Web or mobile-app startups valued at hundreds of millions of dollars, says Tom Hayes, a marketing executive who founded the Techmanity conference and Joint Venture Silicon Valley, a group that promotes regional development. What confuses outsiders is that so much in the Valley “seems trivial, small ball,” Hayes says, “when the myth is that we are supposed to be out changing the world. In fact, our utopian idealism has shrunk in recent years as we’ve come to realize that even little innovations, in the right context, can have enormous impact … and the odds of pulling them off successfully are infinitely greater.” As an example of the “right context,” Hayes cites cars. Autonomous vehicles, he believes, will change the nature of cities and become a new platform, as PCs and smartphones were. “This achievement alone will be enough to create another golden age in the Valley,” he says. “And that’s just one such revolution: drones will be another huge platform, as will mobile medical monitoring devices, including smart watches. And I have no doubt there will be more.”

Linked together

Cofounding LinkedIn made Reid Hoffman a billionaire, but it is as a venture capitalist at Greylock Partners over the last five years that he has become a guru. On any given day, Greylock’s lobby is jammed with as many as a dozen startup teams waiting to meet with Hoffman, who races from one conference room to the next.

Hoffman agrees with Steep’s assessment that Valley technologists are fixated on quick opportunities in apps and software, but he sees that as appropriate, because software affects every level of products and organizations. That means it offers opportunities to have huge impacts.

“It’s not accidental that Tesla is here, because the fundamental thing about its product isn’t the battery but the software,” he says. “So as software tackles one industry after another at the structural level, the companies created will be mostly based here. Similarly, when software defines human ecosystems, especially in English, they too will largely be based here in the Valley. Just look at Twitter, Facebook, eBay, Dropbox, and all of the others. It’s not a coincidence that they are in the Valley. Aggregators too, such as Pinterest. Big data will be located in many places, but most of the big-data analytical toolmakers will be here as well. So will the next generation of [operating-­system] layers—just as Android and [Apple’s] iOS are now.”

This means that there will always be vast swaths of technology where Valley companies don’t compete and big problems for people elsewhere to try to solve. Those challenges don’t mesh with Valley VCs’ expectations that companies start quickly, with low capital costs, and have the potential to scale up tremendously. “There’s a lot of things that we aren’t good at here,” Hoffman says, “and to which we have an almost antibody weakness. We don’t know how to cultivate a DuPont-type company here. Health? Genetics? Probably they will remain centered in Boston, unless [those industries] develop a strong entrepreneurship component. Then they will likely move here.”

Hoffman does share some of Steep’s worry that Silicon Valley companies aren’t paying enough attention to what the rest of the world is working on. He gets down sometimes about the endless “me-too-ism” of the business plans he sees—what he characterizes as “Airbnb for dog hotels.” “If I could have a magic wand,” he says, “I’d wish for more entrepreneurs to take greater and more diverse risks. And if those new ideas fit with the Valley model, then they should be here. And if not, they should think about building their company somewhere else.”

Michael S. Malone has covered Silicon Valley for more than 25 years. His most recent book is The Intel Trinity.

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