THE SECRET HISTORY OF SILICON VALLEY
The Role of World War II in the Growth of Silicon Valley_By Steve Blank
For 20 years, Stanford University students knew Fred Terman as a kindly professor who helped William Hewlett and David Packard start a company, Hewlett-Packard. Fewer people knew Terman as the ultimate Cold War “warrior. He was, in fact, the father of electronic warfare and electronic and signals intelligence and a leader in partnering with the NSA and cia to transform Stanford into an integral part of the U.S. intelligence community.
He also happened to invent the culture of entrepreneurship at Stanford and Silicon Valley. It all started in World War II.
The Electronic Shield
The Allied bombing campaign of Occupied Europe was designed to destroy Nazi Germany's ability to wage war. But by 1942, Allied airmen were dying in droves. The German electronic air defense system was taking an increasing toll on bombers and crews. The Allies desperately needed to shut down the German Air Defense system. So in 1942, the Allies set up the top secret Harvard Radio Research Lab with the goal of defeating the German Air Defense system. Its 800 staffers invented what would become the signals intelligence and electronic warfare industry. Directing this lab was an electrical engineering professor plucked from a school not yet known as an engineering powerhouse: Fred Terman from Stanford.
The Military/University Partnership World War II forever changed the military's relationships with United States universities. Before World War II, the military did research and development in its own military labs. But Vannevar Bush, the head of the Office of Scientific Research and Development, enlisted universities into the war effort and funded them directly.
During WWII, MIT, Cal Tech, Harvard and Columbia received tens of millions of dollars for military R&D, money that forever changed their trajectory in technology. But Stanford, then considered a second-rate engineering school, got almost nothing. Terman, Vannevar Bush's first PhD student, had written a highly-regarded textbook on radio engineering, and so was recruited to run the Harvard Radio Research Lab.
But Terman returned after the war with the idea of turning Stanford into a center of excellence for microwaves and electronics. He started by recruiting 11 members from his Radio Research Lab. They set up the Electronics Research Lab for basic and unclassified ed research. In 1946, the Office of Naval Research gave them their first contract to fund Stanford's research into microwaves.
By 1950, Terman had turned Stanford's engineering department into the MIT of the West.
Another War and a New Game
In 1949, the Soviet Union exploded its first nuclear weapon. In 1950, the Korean War turned the Cold War hot. And the newly formed National Security Agency asked Terman's team to work on classified intelligence and military programs. Engineering set up the Applied Electronics lab for classified programs. Stanford University was now a full, covert partner in government R&D.
In the mid-1950s, our strategic weapon of choice was the manned bomber. In order for the bombers to penetrate the Soviet air defense system, though, the Strategic Air Command and CIA needed details on Soviet radar so they could build jammers. To this end, Terman dedicated Stanford's engineering resources and made Stanford crucial to the National Security Agency and Central Intelligence Agency for electronics intelligence and signal intelligence. At this moment, the Cold War became an electronic war with the goal of uncovering what was going on inside this closed country.
From Cold War to Entrepreneurship
Yet Terman wanted Stanford to focus on advanced research, not the actual production of military systems. So he encouraged his engineering students to start companies that could supply microwave components and intelligence systems to the military. He encouraged professors to consult for those companies. Getting out in the real world is good for your academic career, he told them. And he made licensing Stanford's intellectual property possible. These were heretical concepts in the 1950s and '60s. And they fundamentally changed the Valley into something we recognize today. These ideas caused the Valley to blossom in the mid-1950s into Microwave Valley.
CIA/NSA Innovation
In the mid-1950s, the CIA launched Project Genetrix: They flew high altitude balloons—with 350lb cameras as their payloads—across the Soviet Union. They simply popped the balloons up into the jet stream and hoped the balloons would come out at the other end of the Soviet Union.
But as the CIA was tracking these balloons with radar, it was also picking up an unexpected Soviet radar signal. Eventually the CIA figured out that they were getting this signal because a piece of metal in the balloon was accidentally cut to the frequency of a Soviet height-finding radar and that signal was being picked up in our receiving radar.
This lucky accident spawned Project melody. Every time the Soviets launched an intercontinental ballistic missile (ICBM), the CIA sent up radar receivers in Iran. And we used the Soviets' own missile telemetry beacon to steer those radars. So every Soviet radar within a thousand miles bounced off the Soviet ICBM, and the CIA tracked their reflections. This bit of espionage provided intercepts of all Soviet missile tracking radars including all their anti-ballistic missile radars. These receivers were built and designed at Stanford.
In the late 1950s, the Soviets had upgraded their early warning radar to the Tall King. The CIA and Strategic Air Command wanted to know where these radars were and how many there were
first.
Someone realized that like all radars, the Tall King radar signals continued traveling out into space. But with the right geometry they bounced off the moon when it was over the Soviet Union. The idea was to point radar dishes at the moon, and then use the moon as a bistatic reflector and listen for the Tall King signals. About once a month everything would line up.
But because this idea required very large dishes, the United States in the late 1950s became very interested in radio astronomy. Under cover of a civilian agency, the CIA funded the Stanford University dish, attached electronic intelligence receivers to it, and borrowed it to search for the Soviet Tall King (and later Hen House) radars.
It was the Cold War crisis and not profit that motivated Terman—and the newly-formed companies of Silicon Valley—in the 1950s and the 1960s. The motivation for entrepreneurship was crisis and it found funding from the military not from industry.
Why It's Called Silicon Valley
If it had been up to Terman, Silicon Valley would be known as Microwave Valley. But serendipity arrived in 1956. William Shockley started Shockley Semiconductor, Silicon Valley's first chip company.
Shockley had a WW II military background as extensive as Terman's. He had been director of operations research for anti-submarine warfare at Columbia, head of radar bombing training for the Air Force, and deputy director of all of weapons R&D in the Cold War. Shockley had a reputation for being a terrific researcher, an awesome talent spotter, and a terrible manager. One testament to his poor skills as a manager was the infamous “traitorous eight.” In 1957, eight of his best researchers—including Gordon Moore and Robert Noyce—left Shockley Semiconductor and founded Fairchild Semiconductor.
In the next 20 years, 65 other chip companies start because this one ex-military guy—Shockley—who worked on air to ground radar in World War II, and who happened to manage the team that invented the transistor, started his company in Silicon Valley.
Why We Don't All Work for the Government?
Terman may have been motivated by the Cold War but the Valley, as we know it today, is driven by profit and venture finance. What happened? This started out as Microwave Valley. What changed? The money. Fundamentally, funding for startups in the Valley shifted from the military to venture capital.
Venture capital began simply as a way for rich families to invest. In the early 1940s, J.H. Whitney established a family office to make investments. Lawrence Rockefeller had the same idea and established his family office. So did other rich industrialists.
These family offices were all on the East Coast and tended to focus their investments there, in a wide variety of industries.
But in 1958, after the launch of Sputnik the year earlier, the U.S. government wanted to spur entrepreneurship. The Small Business Administration (SBA) announced it would match every dollar an individual put into a startup. By 1968, 75 percent of venture capital came from the SBA. And, in fact, the idea was so lucrative that corporations set up their own SBAs. And Bank of America, Fireman's Fund, and private companies did so as well.
But everyone was still trying to sort out the right model for investing.
Then in 1978 and 1979, life changed in Silicon Valley when the government made two simple changes: 1) It slashed capital gains tax—from 50 percent to 28 percent. 2) Pension funds were now allowed put up to 10 percent of their holdings into high-risk ventures—venture capital funds being one of them. And to manage that capital, VCs transitioned to limited partnerships. The amount of money directed into VC's jumped by a factor of 10 and Silicon Valley's second engine of entrepreneurship took off by 1979. It was, and still is, fueled by profit.
So in summary: Terman, Stanford, and our intelligence agencies spawned the entrepreneurial culture of Silicon Valley. The military primed the pump as an investor and customer for key technologies (semiconductors used in missile guidance systems, computers at NSA and Livermore, and of course, DARPA's interest in packet switching and the Internet.) But venture capital turned the Valley toward volume corporate and consumer applications.
