The Opinions Essay

Behind the ‘power law’: How a forgotten venture capitalist kick-started Silicon Valley

By Sebastian Mallaby
Contributing columnist
January 27, 2022 at 9:00 a.m. EST

Sebastian Mallaby is a senior fellow at the Council on Foreign Relations and most recently the author of “The Power Law: Venture Capital and the Making of the New Future,” from which this essay is adapted. He begins a Post column next month.

Success has many fathers, and Silicon Valley is no exception. Searching for the origins of this miraculously innovative region, some fasten on 1951, when Fred Terman, the engineering dean at Stanford, created the university’s famous Research Park. Others begin the story in 1956, when William Shockley, the father of the semiconductor, abandoned the East Coast to launch a company on Terman’s campus and actually brought silicon to the Valley. But the most compelling origin story — the one that aims the spotlight squarely at the force that makes the Valley so distinctive — begins in the summer of 1957, when eight of Shockley’s young researchers rose up in revolt against their imperious employer and went out on their own. It was this act of defection that created the magic culture of the Valley, shattering traditional assumptions about hierarchy and authority and working loyally for decades until you retired with a gold watch.

The defection of 1957 was made possible by a new form of finance, what we call venture capital today. The idea was to back technologists who were too dicey to get a conventional bank loan but who promised the chance of a resounding payoff. The funding of the “Traitorous Eight” and their company, Fairchild Semiconductor, was arguably the first big venture deal in the Valley; and from that moment on, teams possessed of grand ideas and stiff ambition could spin themselves out, start themselves up and generally invent the organizational form that best suited their fancy. Engineers, inventors, hustlers and artistic dreamers could meet, combine, separate, compete and simultaneously collaborate, all courtesy of this new finance. Talent had been liberated. A revolution was afoot.

{snip}

And the magic sprang from venture capital. By freeing talent to convert ideas into products, and by marrying unconventional experiments with hard commercial targets, this distinctive form of finance fostered the business culture that made the Valley so fertile. In an earlier era, J.P. Morgan’s brand of finance fashioned American business into muscular oligopolies; in the 1980s, Michael Milken’s junk bonds fueled a burst of corporate takeovers and slash-and-burn cost cuts. In similar fashion, venture capital stamped its mark on an industrial culture, making Silicon Valley the most durably productive crucible of applied science anywhere, ever. By the 21st century, an astonishing 70 percent of the publicly traded tech companies in the Valley could trace their lineage to Fairchild Semiconductor; and every hoodie-wearing innovator owed something to that crucible moment when it raised venture finance.

The investor behind the Traitorous Eight was a 30-year-old MBA named Arthur Rock. Slight, taciturn, his eyes often clouded behind large glasses, Rock was not an obvious founding father, especially not of a swashbuckling innovation in finance. He had grown up poor in Rochester, N.Y., the child of Yiddish-speaking immigrants, and had worked as a soda jerk in his father’s small grocery store. He had suffered from childhood polio, performed miserably in athletics and been brutally victimized by antisemitic classmates. During a wretched stint as an Army conscript, he had bridled at reporting to superiors whom he considered “not too bright.” Perhaps because of these experiences, Rock was reserved to the point of being prickly. He suffered fools impatiently, and the fools always knew.

{snip}



Arthur Rock on the Jan. 23, 1984, cover of Time. (Time/Life Publishing)

{snip}

Sure enough, it did grow. At the formation of the company, Rock had ensured that each of the Eight bought $500 worth of stock. Two years later, Fairchild sold to its main backer, and each founding scientist received $300,000, a bonanza amounting to around 30 years’ salary at the time.

{snip}

Gift Article
https://wapo.st/3ggiU3p

Opinion by Sebastian Mallaby
Sebastian Mallaby is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and a contributing columnist for The Washington Post. He is the author, most recently, of "The Power Law: Venture Capital and the Making of the New Future,” published in February 2022. Twitter https://twitter.com/scmallaby