A History of Silicon Valley

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These are excerpts from Piero Scaruffi's book
"A History of Silicon Valley"


(Copyright © 2016 Piero Scaruffi)

Sharks: the iPhone, Cloud Computing, Location-based Services, Social Games, and Personal Genomics (2007-10)

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The Assembly Line Model of Startup Funding

The first boom of Silicon Valley’s venture capital world took place in the mid-1980s when large semiconductor companies needed money to build “fabs” (short for “fabrication plants”). A fab is an extremely expensive project that requires hundreds of millions of dollars. The age of one-man startups, though, did not require such massive investments. The returns (as a percentage) could be even higher with a much smaller investment. Unlike fabs, that need an accurate plan of implementation, Web-based startups could adjust their functions in real time based on user’s feedback. So all one needed to start a company was just a good idea and a rudimentary website. Instagram, a company of 16 people, had 130 million customers when it was bought by Facebook in 2012.

At the end of the 2000s it was getting so easy and cheap to start a company that the business of funding companies was beginning to resemble an assembly line. When car manufacturing became cheap enough, Ford built an assembly line and launched the first mass-market car. Something similar was happening in Silicon Valley in 2010 in the business of manufacturing startups. Sometimes angels would invest without even having met the founders in person.

This logic was being pushed to the extreme limit by a new generation of angel investors who were sometimes barely in their 30s. The Google, Facebook, and PayPal success stories, plus all the startups that they acquired (Google acquired more than 40 companies in 2010 alone), had created plenty of very young millionaires and even some billionaires. They could comfortably retire, but it was “cool” to become angel investors and help other young founders get started and get rich. These new angels were “kids” compared with the veterans of 3000 Sand Hill Road. Yet many of these kids felt that they could more accurately guess the future of the world and jumped into the game passionately. Needless to say, these kids tended to fund startups that were started by kids even younger than them.

The mindset of both investors and founders was very different from the mindset of investors and founders of the 1980s. The credentials of a founder were often based on popularity, not on a professional business plan. In fact, these new investors “hated” the Wall Street type of founder. They loved, on the other hand, the “cool” kid. The successful founder was someone who could create “buzz” on the Internet about his or her idea, even if he or she had no clue how to monetize that idea. It was, in a sense, the psychology of the high school transplanted into the world of finance. The intellectual idealism of the early Internet was being replaced by the subculture of high-school gangs (albeit one that abhorred drugs and violence).

The new angels, in turn, were not professionals educated by Stanford or Harvard in the subtleties of economics; they were former “cool” kids. They invested based on their instinct, trying to guess who would become the next cool kid. To some extent the venture capital business had always been a statistical game: you invest in ten startups hoping that just one makes it big. But it had always been backed by some (economic) science. It was now becoming pure gambling. The psychology required from an angel investor was more and more similar to the psychology of the gambler who spent the day in front of a slot machine in Las Vegas casinos. The inception of this new kind of venture capitalism was commonly taken to be 2005, when Paul Graham started Y Combinator in Mountain View and incubated eight seed-stage startups.

Another significant change in the way startups are funded took place when the "crowd-funding" website Kickstarter launched (in 2008 in San Francisco by day trader Perry Chen , online music store editor Yancey Strickler and web-designer Charles Adler 's New York-based music company ArtistShare :11.0pt;font-family:"Times New Roman"'>: raise money among ordinary people to fund a (music) event. Kickstarter transferred the concept into the world of the Bay Area startups with amazing success: by July 2012 Kickstarter had funded more than 62,000 projects that had raised more than 200 million dollars. Kickstarter got further help from the government when the JOBS Act was enacted in April 2012: it made it legal for smaller investors to fund a company and with fewer restrictions. Kickstarter's main rival was Indiegogo, founded in 2008 by Wall Street analyst Danae Ringelmann with Slava Rubin and Eric Schell in New York. Another formidable rival would emerge from San Diego in 2010, GoFundMe.

Last but not least, the early adopters too were of a different kind than for previous generations of products. The early adopter of an Intel product or of an Oracle product was a multinational corporation. The early adopter of an Apple gadget was a professional with a good salary, and typically a technology-savvy one. Now the early adopter of a website (say, a social networking platform) was, instead, just a kid himself. The early adopter was not paying anything to use the “product” (the social networking platform). Therefore the profile of the early adopters was, for the first time ever, disconnected from their financial status and instead related to how much spare time they had and were willing to spend on the Internet. The early adopters were typically very young. These “kids” created the “buzz.” They established the credentials of a new platform. The adult audience followed the trend set by a very young audience.


click here for the other sections of the chapter "Sharks: the iPhone, Cloud Computing, Location-based Services, Social Games, and Personal Genomics (2007-10)"
(Copyright © 2016 Piero Scaruffi)

Table of Contents | Timeline of Silicon Valley | A photographic tour | History pages | Editor | Correspondence