In 1957, Gordon Moore and the “Traitorous Eight” formed Fairchild Semiconductor and created the basis of what would become Silicon Valley. But despite the undisputed importance of the microchip, Fairchild’s biggest contribution might have more to do with how the company was started than what it produced.
Little to anyone’s knowledge at the time, how it was formed would set the model for almost every Silicon Valley company that would follow it; unleashing a wave of innovation that continues to this day. Besides inventing the first practical microchip, Fairchild was also the first venture backed startup.
In Silicon Valley, we take venture capital for granted but few people realize what a fundamental shift it represented in the relationship between capital and labor. Since the dawn of capitalism and the industrial revolution, the balance of power has overwhelmingly favored those who controlled the capital. Labor, and all talent associated with it, was beholden to those who owned the factories. The introduction of venture capital essentially reversed these roles with capital now chasing talent. It is difficult to understate what a dramatic change this was. Instead of capital (the means of production) acquiring talent, Silicon Valley runs on the basis of talent acquiring capital.
I’m typically a skeptic of terms like “new economy” since most of the time enthusiasm for such terms ends with a giant bubble bursting. But Silicon Valley’s venture capital model actually did create a new talent based economy long before the internet or ideas about an information economy ever existed.
For thousands of years, economies were based almost exclusively on labor with some leverage provided by land. As industry developed and the means of production grew to a scale beyond the reach of small operators, labor was subjugated to capital and those who owned the means of production. Examples of this can be seen everywhere, most clearly in labor intensive – some would say labor abusive – industries like the manufacturing operations of Foxconn.
In almost every part of the world, if you don’t have access to bank loans (which typically require collateral) or wealthy family connections, it is extremely difficult to launch a new endeavor with any scale. Capital is indeed king. But in Silicon Valley, the rules of capital have been inverted. Talent is king. I can think of no other place where an entire ecosystem exists for capital to pursue talent as an asset class.
The result of this inverted capital system is that the risk for entrepreneurs has largely been removed. Entrepreneurs in Silicon Valley love to talk about how they are different than the rest of the world because they are “pirates” and have a greater tolerance for risk, when in reality the bulk of the risk has simply been transferred to the venture capital LPs. Despite the smaller amount of money at play, a family who mortgages their home to open a restaurant has taken a far bigger relative risk than most entrepreneurs in the Valley. The difference is they don’t benefit from living in a talent driven economy where capital is willing to gamble on them.
This is not meant to discount the sacrifices made by Valley entrepreneurs, but to point out that Silicon Valley operates under a fundamentally different system that continues to drive innovation by removing significant risk factors for talent to work on new developments.
Today Silicon Valley remains the hotbed of venture investing but the model was unheard of before Fairchild. If they had failed, venture capital and many of the Silicon Valley companies born from it would probably not exist as we now know them. By enabling innovators to work outside the walls of corporate constraints, venture money shifted Silicon Valley from a capital focused economy to one in which talent became the most valued – and post powerful – asset.
Fifty years later everyone recognizes Fairchild’s contributions to the microchip, and while is seems impossible to understate the significance of those accomplishments, how the company unintentionally launched a talent based economy may have been an even greater contribution to the continuing success of Valley.