^- Startups and Venture Capital.
On the other side of town in 1956,
someone named William Shockley starts a company.
Now I don't know if any of you know
Shockley's name today, it's not on a lot of things,
but in World War Two he was director of
Naval anti-submarine warfare at Columbia.
And then he moved over to the Air Force
and did radar bombing training.
But he's mostly known, if you're in technology,
as the co-inventor of the transistor
and won the Nobel Prize in 1956,
but what he had to do with Silicon Valley is
he founded the first transistor company,
the first semiconductor company in Silicon Valley.
Now, what's interesting about Shockley
was not that company.
What was interesting about Shockley was
he was a great researcher,
probably the world's best talent spotter,
and equally pretty well-known as
the world's worst manager in the history of Silicon Valley.
And the reason why is he made life so miserable
for his eight best employees that they all got up
15 months after he founded the company and left,
and they started a little company
called Fairchild Semiconductor.
And two of those eight, someone named Gordon Moore
and another guy named Robert Noyce,
would also go off and found Intel.
Now what's interesting about Shockley though,
in 1956, is every other, let me say it again,
every other semiconductor company
that was started in Silicon Valley came from Shockley.
So here's Shockley, let me zoom out,
every other Silicon company came from
this one startup in 1956.
Now what started to happen
about 20 years later
was that private investors noticed that
there was some activity going on
south of San Francisco in technology.
Silicon, semiconductors, this whole chip business,
this whole diagram now, by the mid-'60s, early '70s
is getting kind of interesting,
and while there was some private money funding them
and some customers funding them,
there was no organized venture capital as we know it today.
At best, it could've been described as angel capital.
And so what happened is a couple of smart investors
decided to raise money from pension funds,
private universities, and wealthy individuals
called limited partners, and in 1978 and 1979,
the US government changed two tax rules
that made this actually pretty lucrative for all parties.
One is that capital gains rate was cut in half
essentially from 48 to 25%, but more importantly,
what was called the Prudent Man Rule
for pension funds that said you couldn't invest
in risky ventures was loosened so pension funds
who were sitting on billions of dollars to invest
were allowed to put up to 10% of those dollars,
and for the first time ever, into venture capital funds.
And VC funds until then, which had been kind of
you know a couple hundred grand, maybe a million,
could now tap into tens of millions of dollars
that were never available before,
and so what you start seeing in the mid-'70s
is people inventing
this form of venture capital called two and 20.
The general partners would take 2% as a management fee
and keep 20% of the profits,
and a whole set of firms started to emerge.
A couple first of them were kind of experiments,
but some of them you might still recognize,
Patricof, Kleiner Perkins, Sequoia,
all started building an idea of a culture
that would fund risky ventures,
be patient through the failures,
and make their money
on the obscene returns of the ones that succeeded.
No unicorns yet, not even for the next 25 years,
but it was the first time that there was
a financial asset class that matched the passion
and the vision of the technology entrepreneurs.
And so venture capital is actually
now driving this second wave of innovation
in Silicon Valley.
Again, we had great infrastructure,
we had great culture, we still had no management tools,
but now for the first time,
the motivation instead of crisis was profit,
and instead of getting military financing,
we were now getting venture financing
tied into this profit cycle.
Things are getting interesting because now money
is starting to scale Silicon Valley.