How to Think Like a VC · II · History of Venture Capital
The second part of our nine-part journey into the Silicon Valley VC mindset.
“Silicon Valley” is a concept much larger than Silicon Valley.
The geographic region of Silicon Valley — here I’m rounding it to mean the Bay Area — is home to just under 8 million people. Yet its influence reaches across the country and around the world. It is celebrated and satirized, mimicked and vilified — its impact on the last 50 years is pervasive and inarguable.
How did “Silicon Valley” — as a concept, a mindset, and a way of building the future — come to be, and why did it happen in the Bay Area? What are its core ingredients, and if we want to preserve its magic — the ability to create, to invent the future — what can we do?
I’ve broken this topic down into 6 parts:
- Silicon Valley’s Origins
- The History of Venture Capital Investing
- The Companies that Forged the Valley
- 60s and 70s Counterculture and Silicon Valley
- The History of the Internet
- Coda: Geopolitics Catches up with Silicon Valley
We start with the macro forces that led to the Valley’s emergence.
Silicon Valley’s Origins
Why did Silicon Valley — as a combination of risk capital and rapid technological and commercial innovation — arise in the Bay Area and nowhere else? Countless cities, provinces, and countries have attempted to replicate Silicon Valley’s success but the Bay Area remains unparalleled as a nexus for talent and capital interested in building the future.
Good investors traverse the micro and the macro. It’s not enough to know whether a specific investment is good: you also need to know whether the entities for whom you manage money are going to adjust where they deploy their dollars, and where you should focus to capitalize on those shifts. How do the larger forces at play affect whether innovation takes off in one region or another, or sustains vs. fades?
Here, we pull back the curtain on the unique concurrent combination of talent, policy, and funding that birthed Silicon Valley.
- Steve Blank’s Secret History of Silicon Valley: This hour-long talk given at the Computer History Museum is the single most important thing you can watch to understand Silicon Valley’s evolution. Blank starts with how research universities solved critical US military needs in the 1940s, and from there how a series of key administrative decisions by Stanford’s Frederick Terman, and changes to both tax code (capital gains) and investing rules (e.g. pensions allowed to invest in VC funds) led to (1) rapid tech company formation in the Bay Area and not on the East coast and then (2) an explosion of private funding for tech companies.
- Making Silicon Valley (Christopher Lecuyer, 2006): This is Steve Blank’s talk, expanded. It traces the history of Silicon Valley from the pre-WWII years up until just before the venture capital explosion of the 1980s.
Understanding Silicon Valley’s origins is more than a history lesson; it’s a template for spotting where the next hubs of innovation may (or may not) emerge. The Valley wasn’t inevitable; it was the product of a rare convergence of policy, capital, talent, and culture that aligned at the right moment. Markets aren’t born in isolation: they’re shaped by ecosystems, and the best investors learn to read those ecosystems like a chess grandmaster reads a chess board. To think like a VC is to see beyond individual companies and discern the conditions under which entire industries — and even regions — can take off.
The History of Venture Capital Investing
Silicon Valley wouldn’t exist without massive amounts of capital. While the US Government initially provided that funding, over time (and with key changes to tax law and government policies) private sources took over. Where did modern venture capital come from and why is it uniquely well-suited to technology investing?
Venture capital investing requires large outlier outcomes. One of the takeaways of the prior post, How to Think, is that the economics of VC investing only make sense because there are massive winners to make up for the many zeroes in a VC’s portfolio. New companies are extremely risky: ~20% don’t last more than a year and only 50% make it beyond 5 years. In order for those winners to make up for all the losses they have to be huge and capital efficient.
Consequently, in addition to needing the right balance of government policy (capital gains tax rates, rules around which entities can invest in different asset classes), venture capital only truly emerged as an asset class when technology enabled massively outlier, capital efficient outcomes. Computing is perfect for this: while the initial copy of a chip, or a PC, or a piece of software might be very expensive, the millionth is a fraction of the cost to produce (or near zero in the case of software), but can be sold for the same price. This means ultra-high profit margins.
These books trace the evolution of VC investing: its origins, its growth, and the personalities who made it happen.
- VC: An American History (Tom Nicholas, 2019): Nicholas presents venture capital as part of a long American tradition of risk finance, tracing roots from whaling and railroads in the 19th century to modern tech startups. The book stresses how cultural tolerance for risk, cycles of boom and bust, and policy shifts (like pension fund rules) shaped the industry.
- The Power Law: Venture Capital and the Making of the New Future (Sebastian Mallaby, 2022): Mallaby’s book focuses on the power law nature of VC investing, where a few massive successes account for nearly all returns. The book emphasizes VC’s role not just in funding but in creating markets. In contrast to “VC: An American History”, “The Power Law” is more narrative-driven.
- Something Ventured (2011): It’s one thing to read about the origins of venture capital. It’s another to hear the story directly from the people who lived it. This documentary film brings the history of venture capital to life through interviews with some of its most influential early practitioners.
If you want to supplement, read this blog post by Jerry Neumann — Heat Death: Venture Capital in the 1980s — which highlights a key throughline of VC risk-taking:
People in the VC industry talk about the ’60s, when institutional venture capital took off. They talk about the ’70s, when iconic companies like Apple and Genentech were founded and the microcomputer industry emerged. They talk about the ’90s and the Internet bubble. They don’t talk about the ’80s; the ’80s are the missing piece of the puzzle. You can have lots of plausible theories about what venture capitalists as a class can do to get good returns, until you take the 1980s into account. Then you can only have one: the only thing VCs can control that will improve their outcomes is having enough guts to bet on markets that don’t yet exist. Everything else is noise.
The Companies that Forged the Valley
If venture capital is about betting on markets that don’t yet exist, then the surest way to understand that mindset is to study the companies that build core technology markets from scratch. From transistors to processors to personal computers and beyond, Silicon Valley’s products defined computing’s evolution. The companies behind those products defined the Valley’s business culture: Google’s famous 20% time has echoes of Bell Labs’ research freedom and the semiconductor industry’s family tree (from Shockley to Fairchild to Intel) broke the existing career template of staying at one company for life in favor of striking out on one’s own.
This thread is doubly fascinating for the repeated instances of disruptive innovation: Intel’s survival of disruption, moving from memory chips into processors, and dominant minicomputer companies’ broad failure to successfully transition to desktop computing (e.g. IBM and DEC both slowly fading into irrelevance after dominating corporate computing in the 1970s).
- The Idea Factory (Jon Gertner, 2012): Gertner tells the story of Bell Labs, the legendary R&D arm of AT&T, where breakthroughs like the transistor, information theory, and satellite communications were invented. The book positions Bell Labs as both a model and a lost era of industrial research, showing how its culture and people shaped the technologies that defined the 20th century.
- The Big Score (Michael S. Malone, 1985): Malone’s early history chronicles Silicon Valley’s rise from postwar defense contractors and engineering stalwarts like Hewlett-Packard to semiconductor firms like Shockley, Fairchild, and Intel and startups like Apple and Atari. The book captures Silicon Valley at the moment it was becoming a global symbol of entrepreneurial wealth and innovation. (Feel free to skip the last quarter of the book — it’s heavy on moral panic and light on substance.)
- Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age (Michael Hiltzik, 1999): Hiltzik recounts the story of Xerox PARC, the Palo Alto lab that invented the graphical user interface, ethernet, laser printing, and more. PARC was a paradox, juxtaposing a genius culture of brilliant engineers building the future with incompetent management that utterly squandered their innovations.
- Fire in the Valley: The Birth and Death of the Personal Computer (Paul Freiberger & Michael Swaine, 1984; rev. eds. 1999, 2014): This essential history traces the personal computer revolution from the Homebrew Computer Club and hobbyist hackers to the rise of Apple, Microsoft, and IBM PCs. It emphasizes the countercultural roots of early PC enthusiasts, who saw computing as liberation from corporate control. Absolutely read the most recently revised edition, which follows the PC industry into the 1990s and through the rise of the internet.
For a venture capitalist, these stories are more than colorful history — they’re lessons in pattern recognition. Bell Labs reminds us that breakthrough fundamental science often needs long-term, patient capital (which VC is not always well suited for!); Xerox PARC shows that even the most brilliant inventions fail without the right business model; and the scrappy PC pioneers are case studies in disruptive innovation unseating entrenched incumbents. The companies that forged Silicon Valley demonstrate that the greatest returns come not from following obvious trends, but from backing bold bets on technologies and markets that seem uncertain at the time.
60s and 70s Counterculture and Silicon Valley
Silicon Valley wasn’t just built on transistors and venture dollars. It was also shaped by the Bay Area’s cultural ferment of the 1960s and 70s. Psychedelics, communes, and antiwar protests may seem worlds apart from microchips, but the ideals of personal empowerment, decentralization, and liberation from authority deeply influenced the first generation of computer pioneers. Stewart Brand, Douglas Engelbart, and the Homebrew Computer Club carried those countercultural values into computing, reframing technology not as a tool of bureaucracy, but as a path toward individual creativity and community.
Two books deeply examine the link between these cultural influences and Silicon Valley’s formative years:
- What the Dormouse Said: How the Sixties Counterculture Shaped the Personal Computer Industry (John Markoff, 2005): Markoff explores how psychedelic culture, antiwar politics, and 1960s idealism influenced the early personal computing movement around Stanford and Berkeley, including key figures like Douglas Engelbart and the Homebrew Computer Club.
- From Counterculture to Cyberculture: Stewart Brand, the Whole Earth Network, and the Rise of Digital Utopianism (Fred Turner, 2006): Turner traces how Stewart Brand and the Whole Earth Network bridged the 1960s counterculture with the emerging world of computing. He shows how ideals of personal liberation, communalism, and experimentation helped shape Silicon Valley’s ethos of digital utopianism. The book argues that countercultural values — once anti-establishment — were repurposed to fuel the rise of the internet and networked capitalism.
Silicon Valley’s fringe experiments turned into the cultural foundation for personal computing and the internet. The entrepreneurs of that era weren’t just building products; they saw themselves as channeling a generational ethos into technology.
Technology is neither good nor bad, but a mirror. What we believe we can do with it is defined by our imagination, in turn shaped by our context. Markets often emerge not just from technical advances but from shifts in culture.
There’s a reason many of the most successful VCs still live in the Bay Area: if you don’t understand the culture in which innovation is happening, it’s hard to see opportunities before others do.
“What people in Silicon Valley are doing on the weekend is what everyone else will be doing in ten years.” — Paul Saffo
The History of the Internet
If Silicon Valley has a defining achievement, it’s the creation of the internet — an idea that began in defense research labs, migrated through universities and hacker collectives, and ultimately exploded into the consumer web. No other innovation so perfectly illustrates how decades of technical groundwork, visionary leadership, and unexpected cultural adoption can converge to create markets of staggering scale. In investing, timing is everything, and the internet is both case study and cautionary tale: a reminder that infrastructure can incubate for decades before suddenly unlocking vast new opportunities.
- The Dream Machine (M. Mitchell Waldrop, 2001): Waldrop traces the visionary work of J.C.R. Licklider, whose dream of “man-computer symbiosis” inspired ARPA and seeded the intellectual foundations of the internet. The book highlights how Licklider’s influence on academic researchers and government funding created an environment where interactive computing could flourish. Licklider laid the intellectual foundations for the development of network computing and, eventually, the Internet.
- Where Wizards Stay Up Late: The Origins Of The Internet (Katie Hafner and Matthew Lyon, 1999): This narrative history follows the engineers who built ARPANET, the first functioning computer network, and documents both their collaborative relationships and the ideas they conceived. This is the book to read to understand the technical birth and evolution of the Internet.
- Architects of the Web: 1,000 Days That Built the Future of Business (Robert Reid, 1997): This book shifts the focus to the internet’s commercialization in the 1990s, profiling early internet entrepreneurs like Marc Andreessen, Jerry Yang and David Filo, Pierre Omidyar, Jim Clark, and Jeff Bezos. It brilliantly captures the exuberance and volatility of the first-wave Internet.
- How the Internet Happened: From Netscape to the iPhone (Brian McCullough, 2018): McCullough’s book is broader in scope, covering from Netscape through the dot-com bubble, Web 2.0, and the rise of platforms like Google, Facebook, and Twitter as well as the iPhone. Whereas “Architects” profiles a few entrepreneurs deeply, McCullough’s book is as much about the strategic and macro shifts as it is the individual players. For an even deeper dive and interviews with the very people covered in the book, I’d highly recommend his podcast, The Internet History Podcast, out of which this book was born.
For venture capitalists, the history of the internet is a playbook in recognizing when deep infrastructure is about to collide with cultural readiness. The early decades — funded largely by government and academia — offered little obvious commercial upside, yet they laid the foundation for one of the greatest investment opportunities in history. The entrepreneurs of the 1990s and 2000s succeeded not because they built the technology itself but because they sensed how to package it at the right for mass adoption, then scale it. VCs look for those moments when hidden technical progress suddenly crystallizes into a new market — when yesterday’s research project becomes tomorrow’s dominant platform.
If you’re looking for further reading, I’d recommend Po Bronson’s The Nudist on the Late Shift (an account of Silicon Valley culture during the dot-com bubble) and Ken Auletta’s World War 3.0 (a deep dive into the Microsoft vs. Netscape browser wars).
Coda: Geopolitics Catches Up with Silicon Valley
Much as Silicon Valley’s origins lay in industrial policy, shaped and funded by the US Government during and after World War II, so too are we now forced to reckon with the interplay between technology and geopolitics.
While Silicon Valley was famously and reflexively apolitical through much of its growth from the 1970s through 2010, it is now reckoning with a very different landscape. With international trade, economic, environmental and industrial policies distorting supply chains and social media rewiring the information ecosystem, technology has re-emerged as a critical strategic asset.
- Chip War: The Fight for the World’s Most Critical Technology (Chris Miller, 2022): A detailed, essential history of the the semiconductor supply chain and why it’s now centered on Taiwan — a massive strategic liability for the US. Miller traces how U.S. dominance gave way to fierce competition with Japan, South Korea, Taiwan, and now China, with Taiwan’s TSMC emerging as a pivotal player.
- Apple in China: The Capture of the World’s Greatest Company (Patrick McGee, 2025): This book illustrates America’s strategic liability through the lens of one of its most successful and visible companies, Apple. It interweaves Apple’s needs as a company — cost, speed, and volume — with the constraints it faced both in the US and abroad, and how it both taught its manufacturing partners critical capabilities and in turn became dependent on them for its survival.
These two books are just the tip of the iceberg. For one click deeper on the contrast between how politics in each of the US and China shape their industrial and economic policies, I’d strongly recommend Dan Wang’s Breakneck: China’s Quest to Engineer the Future.
Special Topics
These aren’t core to understanding Silicon Valley history, but are insightful deep-dives into niche related topics.
- The Chip: How Two Americans Invented the Microchip and Launched a Revolution (TR Reid, 2001): An account of the invention of the transistor and the legal fights between Texas Instruments and Fairchild Semiconductor over the critical patents surrounding it.
- A Mind at Play: How Claude Shannon Invented the Information Age (Jimmy Soni, 2017): A detailed profile of Claude Shannon, the father of modern information theory, on which much of modern communication technology is built.
- The Tinkerings of Robert Noyce (Tom Wolfe, 1983): An entertaining profile of Robert Noyce written for Esquire Magazine that very much channels the American exceptionalist heroism of “The Right Stuff”.
- Hackers: Heroes of the Computer Revolution (Steven Levy, 1994): Levy’s book is the foundational chronicle of the origins of “hacker” culture. Starting at MIT in the 1950s and continuing through personal computing and early video game development, Hackers documents how a few eccentric visionaries transformed computers from corporate mainframes into personal tools for creativity and freedom, and how the hacker mindset (open, playful, and subversive) became the cultural DNA of Silicon Valley itself.
- Season of the Witch: Enchantment, Terror and Deliverance in the City of Love (David Talbot, 2012): San Francisco’s 20th century history, told in a series of vignettes. While San Francisco didn’t become a major force in Silicon Valley until after 2000, its cultural context has left imprints across the Valley.
During 2020’s pandemic much was made about the end of Silicon Valley, with various VCs and startups fanning out to Los Angeles, New York, Austin, Miami, but with the advent of the AI age it’s clear nothing could be further from the truth. It’s just as dynamic as ever, drawing its temporary diaspora back for the next wave of technical and business change. After semiconductors, personal computing, the internet 1.0, and social media, Silicon Valley is just as vital as ever.
Politics, long absent from Silicon Valley and VC considerations, are now at the forefront: from domestic politics to the U.S.’s geopolitical rivalry with China, a new set of macro forces are shaping business and technological evolution. But this is where Silicon Valley began: with a heavy government hand shaping its research and largest companies (e.g. Bell’s sanctioned monopoly of the phone system). Everything old is new again.
After mapping the grand sweep of Silicon Valley’s evolution, next we’ll explore deep dives of the critical people and companies who forged its identity in Biographies of Tech Greatness. Apple, Intel, Facebook, Google; Elon Musk, Steve Jobs, Jeff Bezos, and more — these are the superstar people and companies that immediately jump to mind when people think of Silicon Valley and the myth of a couple of engineers in a garage building something that changes the world.
Have feedback? Think I’m missing something critical, or have a resource to recommend? Let me know!