How a Bad Boss Kickstarted Silicon Valley... from Business History

0:15 Hey, it's Jacob. As you may know, I also host a show called Business History. And a lot of the time when we're making episodes of Business History, I think people who listen to What's Your Problem would like this episode of Business History. So starting today, we are going to run some of those episodes in this feed, in the What's Your Problem feed. If you already subscribe to Business History, thank you. Welcome to Skip These. And if you don't already subscribe, I hope you like them. Hope you like these episodes. We're going to start with one that is about really the origin of Silicon Valley, how Silicon Valley came to be. I hope you like it.

1:08 Imagine you're just starting out. in your field. And one day out of the blue, you get a call from this guy who basically invented the field, this guy who is a giant in the field. And he says, I want you to come work for me. Dream come true. So of course, you go, you work for him. But he turns out to be an absolute nightmare. This is what happened to young Robert Noyce in 1956. And I'm going to argue on the show today that this chain of events is is actually what led to the creation of Silicon Valley. One bad boss, Silicon Valley. One bad boss, a couple geniuses, the right mix of technology and historical facts, Silicon Valley.

1:52 Let's do it.

1:52 So, Robert Noyce, the guy who got the call, he was a golden boy. He was a real corn-fed Iowa American golden boy. He grew up in Iowa in the 1930s and 40s, went off to Grinnell College in his hometown. When he was there, he sang in the choir, he was a champion diver, and he played the leading man in a local radio soap opera.

2:18 Heartthrob.

2:18 Heartthrob. A few decades later, the great Tom Wolfe wrote a profile of Noyce in Esquire. Yeah, why don't you give us a little hint, Robert?

2:25 Let me read this. While he looked at you, he never blinked and never swallowed. He absorbed everything you said and then answered very lovely in a soft baritone voice, And often with a smile that showed off his terrific set of teeth. He also had a good dentist. Look at that.

2:40 Yeah, Wolf said it was like he had a halo floating on his head. And, kind of annoyingly, he was a genius. Yeah. Got into transistors before anybody really knew what transistors were. Went off to MIT. Got a PhD. And then he got a job at this little electronics company in Philadelphia. And... He got bored. Suddenly, he's in his 20s. He's a golden boy. He's working at this kind of second-tier place, and it's just not going that well.

3:10 And then one day, Noyce is at his office, and the phone rings, and he picks up the phone, and hears this voice on the other end. The voice says, Shockily here. Noyce later said this was like picking up the phone and talking to God. Three months later, Noyce moved to Mountain View, California to work.

3:31 Middle of nowhere.

3:32 At the time.

3:33 Yeah.

3:33 Turns out God, William Shockley, is a horrible boss, a paranoid micromanager. Cruel, really. Cruel. And the fact that he was such an asshole wound up having profound consequences for the world. I'm Jacob Goldstein.

3:51 And I'm Robert Smith. And this is Business History, a show about the history of business. Today on the show, the invention of Silicon Valley, a place that is an actual place, But it's more a state of mind, a culture where restlessness is a virtue and quitting your job is heroic.

4:09 Yeah, I mean, Silicon Valley, it's this agglomeration, right? It is the most important agglomeration in the history of agglomeration, perhaps. It has created the most important technologies of the 21st century and truly the most valuable companies in the history of the world.

4:25 And it started with an asshole, William Shockley, and a golden boy, Robert Noyce.

4:30 So let's start with Shockley. He really comes first in the story. Shockley was roughly a generation older than Noyce. He grew up in Palo Alto in California in the 19-teens and 20s when it was, you know, a little college town surrounded by farms and orchards.

4:46 Yeah, think Grapes of Wrath, East of Eden, right? These classic books about farm workers. That's what Silicon Valley was at the time. Yeah, yeah.

4:53 Right over the hill from Salinas, right? Not far. Shockley was a difficult child. He bit his mother a lot. He bit multiple babysitters. He didn't go to school. He was homeschooled until he was eight. His parents were high achievers. His dad had a Ph.D. from MIT. His mom graduated from Stanford. Was one of the first people to solo climb Mount Whitney. I believe the highest mountain in the continental United States. And, you know, Shockley eventually went to school and turned out to be a brilliant student. Got a Ph.D. from MIT. And in 1936, he went off to work at Bell Labs in New Jersey.

5:32 We haven't really talked about Bell Labs yet on the show, and we should do a whole episode about it because it was really critical for all the development of the technologies of the 20th century. It was set up as AT & T' s research lab in the early part of the century. And AT & T, of course, had a monopoly on the phone system. So, you know, they had a ton of extra money. But more than that, bringing all these geniuses together to work on technology was wasn't just about phones. It was about any hard problem that they could think of. They developed the first solar panels, right?

6:02 The first cell phone system, the quartz clock. They found evidence of the Big Bang. The creation of the universe was discovered by the phone company, which is amazing. And the main part of this was this idea that if geniuses just interact, they will come up with solutions that they could not come up with alone. And if you want to picture it, one of the Bell Labs, there were several of them, one in lower Manhattan, a couple in New Jersey. One of the Bell Labs is the building they use for the show Severance.

6:35 Is that true?

6:36 That giant hall, you know, the outside shots of it, that's what Bell Labs look like.

6:41 I didn't know that. So Shockley is hired and, you know, there is all of this incredible creative work going on, but Shockley is hired, frankly, to work on A more practical problem for AT & T. A more phone company-centric problem. And that is this. Vacuum tubes. Vacuum tubes were these little glass tubes, kind of like an elongated light bulb.

7:04 The size of your thumb, maybe a little taller.

7:06 Okay. And the fundamental thing they did was amplify electric signals.

7:12 Which is a huge problem in technology at the time, right? If you speak into a microphone or, say, a telephone headset... The electricity your voice generates is tiny. The signal is very small. How do you get that into wires that go across the United States? You have to amplify it along the way. And they use these little tubes to do it. Now, the problem is these tubes are fragile, like they are glass tubes, and they used a tremendous amount of energy. They would heat up. In fact, you had to like let them heat up before you could even turn on the tube radio at the time or the tube amplifier.

7:45 You're really speaking as a man who is familiar with vacuum tube technology, Robert.

7:50 I have spent some time with old radios where you have the vacuum tubes and, of course, the audio professionals who say, Those were the golden days.

7:57 You are that audio professional.

7:59 I love a vacuum tube, but go on.

8:01 So, okay, so it's the 30s. Long-distance calling is growing fast, but the vacuum tubes, for the reasons you're describing, are a nightmare. And also, by the way, they burn out, right? They are like incandescent light bulbs. It's very hard to scale a company on this technology that's expensive and unreliable, and you have to keep sending people out to put in new vacuum tubes, right? Right. So Shockley is put in charge of this team that's trying to find a better replacement for the vacuum tube.

8:30 Something that is solid state that doesn't break. Yeah, yeah, that doesn't break, that's cheaper, that scales.

8:35 So, you know, Shockley at a fundamental level is thinking about electricity and specifically how electrons move through materials. And, of course, there is this spectrum where on one end of the spectrum you have insulators like glass and rubber where electrons don't flow easily through them. On the other end of the spectrum you have conductors like copper and Where electrons flow right through them.

8:56 If only there was something in between, you know, not an insulator, not a conductor, sort of a quasi-conductor?

9:12 And people were starting to understand that you could maybe control them so that their behavior would change under different settings. And that if you could do that, if you could get it to switch from basically an insulator to basically a conductor, you could use that as a way to amplify an electric signal.

9:31 You could put a tiny electrical signal in there and it would be boosted by like a hundred times is the way it works. Yes.

9:37 And the dream is it would be, you know, a cheaper, more reliable version of the vacuum tube. So Shockley's working on this in the late 30s. And then Hitler invades Poland. Damn it. World War II comes along, and Shockley and every other high-powered nerd in America gets reassigned to go work on the war effort. Side note, I feel like we should do a show or a series sometime of, like, how the nerds beat the Nazis. I feel like there's a lot there.

10:04 Yeah, yeah.

10:05 I mean, one obvious one is the first sort of modern style computer was built as part of the war effort.

10:11 Using vacuum tubes.

10:11 Using like 18,000 vacuum tubes in a room that was like 1,500 square feet, right?

10:16 Yeah.

10:17 Bigger than, you know, your apartment. You know, a million times weaker than an iPhone or whatever. But yes, that was a computer. It was used to calculate the trajectories of artillery, which I love. Shockley, for his part, was working on tactics for Navy convoys to fight subs, which is dear to my heart because my own grandfather was on a Navy convoy in the North Atlantic fighting Nazi subs. Okay, so the nerds beat the Nazis.

10:44 Good news.

10:44 Thank you, nerds. And then Shockley goes back to work. trying to figure out a replacement for the vacuum tube. And it is hard to get it to work, right? It's classic leap from theory to practice is quite hard. They can't get it to work. They can't get it to work. But then finally, in November of 1947, two researchers on Shockley's team, they start to figure it out.

11:08 They have what comes to be called the miracle month. And the next month in December, they get this slab of germanium with a little bit of, like, jerry-rigged foil on it to work, to amplify an electrical signal by a factor of 100. And they call it the transistor.

11:28 And Shockley, William Shockley, is not throwing them a party, is not entirely psyched. Here, let me read his quote. My elation with the group's success was tempered by not being one of the inventors. I experienced some frustration... that my personal efforts started more than eight years before had not resulted in a significant inventive contribution of my own.

11:54 Not a lovable guy, Shockley. Not a team player, right? He, in fact, goes to the lawyers at Bell Labs and is like, you guys should put my name on the patent. I know I didn't actually do the work, but come on, it's my team. I've been working on it. The lawyers don't actually agree to do this. They don't do it.

12:11 And so Shockley goes off in secret And starts working on a better way to make a semiconductor, basically. Take this work and improve upon it. And remember, he is a genius, right? He is a very talented engineer. And so he succeeds.

12:26 Obviously, we're making fun of Shockley a little bit. But this, like, monomaniacal resentment that he had, and had his entire life, leads to all of these breakthroughs.

12:37 Yes, well, not only does it lead to these breakthroughs, right? So he's acting like a jerk at Bell Labs. He's acting completely... contrary to the ethos of the place, right? Which is supposed to be everybody comes together. And so once he does this, nobody wants to work with him anymore. He gets passed over. And so he decides, and here's the quote, he decides, the hell with that. I'll go set up my own business. I'll make a million dollars that way. So in 1954, Shockley leaves Bell Labs, leaves New Jersey, moves home to Palo Alto, California.

13:10 Still remember, Kind of the middle of nowhere.

13:12 Kind of the middle of nowhere. Still known for its annual prune festival. Although, to be fair, I mean, Hewlett Packard was there by this time. It's a legit company. Stanford was growing. They had just set up their industrial park. But yes, far from the center of the technological action, right? Bell Labs was the center of the tech world. MIT was the center of the tech world. The East Coast was where all the action was, not California. Shockley is moving to Palo Alto because it's home. And two years after he moves home, he starts a company that he calls Shockley Semiconductor with the idea of making transistors ubiquitous.

13:48 And he writes in his journal something I actually find kind of poignant. He writes, idea of setting world on fire, father proud.

13:56 We're already seeing the very beginnings of the Silicon Valley ethos, right? The person who doesn't really get along with others, the resentment, you know, the focus, right? But also this other thing that like, I can change the world, the universe.

14:10 Yes, yes. He is a very smart engineer with a lot of ambition and some tragic flaws, right? And all of those are important in the story and classic Silicon Valley traits. So Shockley gets there. He is, in fact, a visionary. He sees the future and he is right, right? He sees that semiconductors, the transistor, is going to be useful in a lot of ways, not just for the phone company, right? Like transistor radio's are starting to be a thing around this time. Hearing aids. It's clearly going to be really important for military applications.

14:43 Because until this time, anything electronic had to stay in one place. So he's seeing this world where you can move electronics. Yes.

14:51 And they won't break.

14:52 Yeah.

14:52 Miniaturization, right? Things getting smaller. This is a huge theme that is going to be key to the whole 20th century.

14:58 And I remember in the 1970s, getting a transistor radio, it was so important that they had it in the name. You got a transistor radio that Because people were still like, I can't believe a radio can be held in my hand.

15:10 Robert Smith, am I right that you actually bought a transistor radio a year ago or something?

15:16 I bought 10 of them for my students. Just so they could see what it was like. They could move the dial. And yes, you could still buy them on Amazon.

15:22 Does it have the pull-out antenna?

15:24 It does have the pull-out antenna.

15:26 We had one at home. We used to listen to the baseball game. We used to listen to the Padres games on a transistor radio.

15:31 I still have one in my shower. I listen to it every morning.

15:34 I love that. So Shockley has this vision. He is right about the future of the world. He is a genius who has been central to the invention of the transistor. He started his company, and now he needs a team. And so he calls his, you know, engineers from Bell Labs. He's like, hey, let's do this. They're like, no, I know you. There's no way I'm leaving the center of the world to move out to the middle of nowhere to work for you.

15:58 So he has to find people who don't know him.

16:00 Who don't know him, but who know of him. That's the sweet spot for him. This is how he finds Robert Noyce, this golden boy engineer we talked about at the beginning of the show, right? Noyce had actually gotten a hold of an early transistor when he was in college, before anybody really, you know, knew what they were. He was really excited about it. And by the time Noyce gets this call, he's working at this second tier electronics company in Philadelphia. And suddenly out of the blue, William Shockley, the great genius, calls him on the phone. And as Noyce said later, It was like he whistled and I came.

16:36 Shockley is a good spotter of talent. He hires like a dozen, by all accounts, extremely talented engineers, young guys in their 20s. Another key we're going to talk more about is Gordon Moore of Moore's Law. And so they get out to California. And at first, it's great. Noyce and Moore and these other young engineers are living the dream, right?

17:00 Working hard. for this guy who founded their field, who helped discover the transistor. And he's got this former apricot shed in Mountain View that's the headquarters.

17:12 Which is probably worth $ 10 million. Yeah.

17:14 Shockley really is talented, right? He has this breakthrough idea right at the beginning of the company, which is this. The transistors that he'd been working on at Bell Labs were made of germanium. But germanium is hard to work with. It's brittle. stops working at high temperatures. And so he decides to use silicon, of course, another semiconductor.

17:36 It would have been weird if it were Germanium Valley, right?

17:39 I like Germanium Valley. They call themselves germies or something. Silicon's cheaper. It's easier to work with. But, you know, it's hard to get things to work. It's hard to produce them economically at scale. It's hard to make hardware. But it's a problem they think they can solve, which is the sweet spot, right? If you're a young, ambitious engineer, it's where you want to be. They all know it's going to be big. this very ambitious thing they're trying. And, you know, every morning at 8 a.m., the team shows up at the headquarters in the former apricot shed. And Shockley conducts what Tom Wolfe, the journalist, calls the arcane symphony of, you know, getting all these engineers to work together.

18:19 And Shockley apparently had this incredible intuition for engineering and for physics. One of the engineers who worked with him said, His intuition for experiments was so good, it was like he could see individual electrons. He just saw what was going to happen. Isn't that great? Isn't that beautiful?

18:38 If only he could have seen individual human beings, he would have been much better off. Yes, yes.

18:45 A classic kind of problem. And soon, this sort of monstrous side of Shockley starts to show itself. He gets paranoid. There's this moment when a secretary cuts her hand on a doorway. There's like a little pin or something sticking out of the doorway. And Shockley becomes convinced that an employee is trying to sabotage the team, demands that everybody take a lie detector test, which they refuse to do.

19:12 He doesn't get over it, stays paranoid, winds up splitting the engineers into different teams and not telling one team what the other is doing, hiding information, which is like as far as you can get from the dream, from the Arcane Symphony, from Bell Labs, right?

19:26 And at this point, it's starting to sound like mental illness. Yeah.

19:30 It really is. Yeah. Something is wrong with William Shockley, right? And around this time, in 1956, he actually wins the Nobel Prize, shares the prize for his work on semiconductors, on transistors, and it only makes him worse. He has this paranoid idea that there were people who were trying to keep him from getting the prize he writes to the Nobel Committee saying like tell me the names of my enemies.

19:58 After he won the prize.

19:59 He's won the prize. Like, take the win, William Shockley.

20:03 Unbelievable.

20:04 And then he does one more thing. And, you know, you can get away with a lot if you're managing a team of engineers. But there is one thing, if they're ambitious and talented, that you cannot get away with. And that is becoming less ambitious, scaling back the vision. And that is what he does around this time. He decides that rather than making a silicon transistor that can be used for anything, but that's quite hard to make that they haven't really figured out yet. Instead of doing that, he decides that they're going to make something that has a clear, defined, limited use case. And that is a semiconductor that can do mechanical switching in telephone exchanges.

20:43 Oh, he wants to revolutionize the phone company?

20:45 Yeah, like Come on, man, right? Like, we came out here to the apricot warehouse to change the world.

20:52 And you want to make calls clearer. Okay.

20:54 So this is, like, the last straw for a lot of the young, talented engineers. But remember, this is not an era where if you're, like, a young, talented engineer on the forefront of technology, you can just quit and go do your own thing, right? Like, that doesn't exist yet. You know, sure, Shockley started a company, but he was, like, this very senior guy. He invented the industry. He was about to win the Nobel Prize. And crucially, right, There's no money for them. Nobody's going to give them money.

21:21 There's no venture capital industry. That is not a thing. So one of these young engineers, a guy named Eugene Kleiner, thinks, who can I call? He thinks, I'll call my dad's stockbroker back in New York.

21:32 That guy knows money.

21:33 That guy knows about money. And he calls him. And the broker puts him in touch with another guy at the firm, this 30-year-old Harvard MBA named Arthur Rock.

21:44 Knowing 30-year-old MBAs, it was almost like they were pushing him off on the young guy. Like, you understand this stuff. Let the young guy handle it. Yeah, I mean, Rock did like.

21:52 You know, kind of more interesting, more risky ventures. And so Rock and another banker, they fly out to San Francisco and they meet with Kleiner and Moore and a few other disgruntled young engineers from Shockley Semiconductor. And Rock is talking to them and he's like, well, these guys are smart and I believe that transistors... are going to be a thing. And he's like, look, you guys are smart.

22:17 You've got the pocket protectors and the thin ties. You see the future. I'm like, I don't want to say you're a bunch of nerds, but like, is there somebody you work with who's like, got some charisma, who walks into a room and people want to follow him? And they're like, yes, yes. As a matter of fact, our buddy, the former Soap opera starred diving champion. With the perfect teeth.

22:41 With the perfect teeth. He's just chilling back in Palo Alto right now.

22:45 They thought of Noyce.

22:45 They thought of Noyce.

22:47 Noyce.

22:48 So they go back and they convince Noyce to go talk to Arthur Rock, essentially to join them. And I believe it's the very next day. Noyce goes with these seven other engineers and Rock sees Noyce and he's like, yes, this is the guy we need.

23:05 I love that the money guys are already like, I need someone who looks like a president of a company.

23:10 And is a genius, right? Not trivially. And Rock agrees to work with them. And these eight make a pact that if they get the money, if they can, they're going to leave Shockley Semiconductor. And I want to make the case in a slightly overdetermined, but I think fundamentally accurate way, that this moment when these eight engineers and this banker make this agreement. This is the moment when Silicon Valley is born.

23:37 Not when the first company has started, the Shockley Semiconductors. It's when there's a revolution and they leave to start a second company. And that really is the spirit of Silicon Valley. That's why they're all located in the same place, because they can do this. That's the promise.

23:54 Yes, you can do it even if you have no intellectual property. No money, no customers, right? Just guts and a dream and some amount of raw talent and a banker who is willing to help you find the money.

24:07 That's a key part, right? So you have money and ambition and talent. And like that is Silicon Valley.

24:14 Yes.

24:15 Love it.

24:15 Yeah. In fact, these eight guys, they become legends in Silicon Valley and they become known as the traitorous eight because they're, you know, being traitors to Shockley, to Shockley Semiconductor. And I want to just dwell for a sec on that word traitorous, right? Because it is a word that has a very negative connotation as a general matter. A traitor is a bad person.

24:36 Yes.

24:36 But in the context of Silicon Valley, it is heroic. These guys are leaving this company because it has a bad boss who lacks vision. They're being traded for the greater good to start this company. And that is the core.

24:48 They're pirates.

24:49 They're pirates. Very good.

24:51 Yeah.

24:52 Now, at this moment, I believe 1957- This whole thing that we're talking about is not a thing, right? There is not this spirit of doing this. This is not a known thing. There is not an ecosystem of capital ready to support them. And so Rock, the banker, he starts calling around, seeing if there's some company, basically, that wants to support these guys. And everybody says no, because why would they say yes, right? They're like, if we wanted to make semiconductors, we'd just hire a bunch of engineers. Like, why would we give it to some random guys? But after a few months... Somebody tells Rock he should call this guy named Sherman Fairchild. Great name. Interesting guy. Son of one of the founders of IBM.

25:38 Nepo baby.

25:38 Nepo baby, but also talented and successful on his own. I guess not on his own. That's the Nepo part. But a talented and successful guy. He got into photography early in his life. started this company Fairchild Camera that wound up making a lot of the like aerial cameras used in World War II. Also loves to take a risk, never got married, loves to spend money, built himself this glass house in Manhattan, goes out to the clubs every night.

26:05 So really the perfect guy to fund the Trader Sate. So he ends up agreeing to put up $ 1. 5 million. Went a lot farther back then. But, you know, it's not like a start-up like we would know it today, because people didn't make those deals. Instead, what he's creating is this semi-autonomous division of Fairchild Camera. The trader estate will get some equity, but Fairchild will have an option to buy the project, the company, outright for $ 3 million if it succeeds. So they agree to the deal. This is going to be the deal. Now the trader estate are ready to leave Shockley. Now they've got their exit.

26:47 And on September 8th, 1957, Gordon Moore broke the news to Shockley. And it's interesting because Shockley was clearly paranoid, and yet he didn't see this coming. He was shocked. He staggered out of the room. He felt completely betrayed. And the company, Shockley Semiconductor, it never recovered. It never recovered from these guys leaving. Kind of staggered on for a while, never did anything great. And Shockley himself became a professor of engineering at Stanford And then his story gets kind of more grim, like he gets obsessed with race and IQ and eugenics. It gets kind of bleak.

27:25 And frankly, that's enough, I think, about Shockley. That's the end of Shockley in our story today.

27:30 Because the people we care about are the pirates. The eight engineers who left to start something new in 1957 are heroes of the Traitorous Eight. And we'll hear more about them after the break.

28:07 And we're back. Trader Estate have just left Shockley Semiconductor. And on October 1st, 1957, they found Fairchild Semiconductor, a semi-autonomous division of Fairchild Camera and Instrument. Three days after they started the company, the Soviets sent Sputnik into orbit.

28:29 Amazing. An amazing confluence of events. Amazing, right?

28:33 I mean, the U.S. is completely surprised by this, right? This is the first satellite to orbit the Earth ever. And it's terrifying for the Americans, right? I mean, you know, America is afraid of the spread of communism. It has gone from the Soviet Union to Eastern Europe to North Korea.

28:49 To the skies above your home.

28:51 Literally, it is now flying over your head, right?

28:54 And they think we need a lot more electronics that are portable and we can put on planes and rockets and satellites of our own. Yes.

29:02 And to be clear, this is extraordinarily lucky timing for... Noyce and Moore and the rest of the trade restate, right? Like their geniuses, there's a good chance they would have succeeded anyway. But a useful lesson, it is great to have lucky timing in business.

29:18 And a desperate customer, which was the U.S. government.

29:21 Yeah, right. There is now suddenly this space race. This is a thing now. The Soviets are winning the race. The U.S. has to catch up. And so, you know, it's like Sputnik went up and billions of dollars in government funding rained down on Fairchild Semiconductor and labs around America. Because you can't fit many vacuum tubes in a satellite, in the nose of a rocket, in, you know, a fighter jet. You know what you can fit a lot of? Transistors.

29:51 So now there is essentially unlimited demand from the government for Fairchild to build transistors.

29:58 But they still have to make it work. It is not easy to do. It is a very hard technical problem because it's not just you put some silicon on and put some wires on it. Even a speck of dust on one of these early transistors could short it out, could create a problem. Right.

30:16 And it's, you know, we think of breakthroughs as binary. It's like, oh, they figured out how to make a silicon chip, done. But production and scale and efficiency are these endless problems, right? And they are extremely inefficient. They have an extremely high failure rate. And so they're trying, trying every day, how can we make this better? How can we make it faster? How can we have fewer of them fail? And to that end, one of the engineers at Fairchild had this idea, and that is, okay, so the fundamental problem is the silicon is super finicky and fragile. What if we protect it by leaving a layer of silicon oxide on top of the chip, and then...

30:59 We just put little tiny windows in that silicon oxide layer wherever you need to access the silicon directly.

31:06 It's like painting a house.

31:08 Sure, right, where the paint is protecting the house and then there's like a window. Is that the metaphor? Okay, I buy it. So he takes this idea to Noyce. And Noyce loves the idea. Noyce has his own metaphor. He says it's like wrapping the silicon in a cocoon, which I like. And he takes the idea to Fairchild's patent lawyer. And the patent lawyer, being a good patent lawyer, says...

31:29 I love it. Let's patent the hell out of it. Don't just tell me this one use. Spend a few days and think of all the possible uses that we can make of this little idea so that we can build as big a patent moat as possible. So Noyce starts thinking about it, starts talking to Moore, you know, doing stuff on the chalkboard. And he's like, OK, the problem isn't just that the silicon is finicky, right? Like, These little transistors, they're complicated. And on every one, we've got to put like little wires. We actually have to solder by hand wires into every chip. Yeah, because you have to get the signal in there and then you have to pull the amplified signal out. And just imagine just hundreds of little tiny wires, right? And they think, well,

32:10 wait a minute. What if we can sort of etch this cocoon a little bit?

32:15 And essentially... Print the wire on top of the silicon oxide on top of the silicon. So basically the wires are in the little thing.

32:25 Yes, yes. And now that he's got this, he goes even bigger, right? He thinks about an even bigger problem that he and the industry are facing, and that is the uses of transistors are multiplying and getting more complex, right? People are starting to build computers with transistors instead of vacuum tubes, and they have all these little components, right?

32:47 These complex circuits with not just transistors, but capacitors and resistors. And there can be thousands of connections among the components. And people are wiring them all together by hand for every computer, right? Which is a total nightmare for manufacturing, extremely hard to scale. And so Noyce is thinking about this transistor in a cocoon. And he's like, wait, it doesn't just have to be a transistor and the wire. Like, We could use this idea to put all kinds of things on one piece of silicon, right? Like we could put an entire circuit, all the components on this one piece of silicon. This idea is the integrated circuit. This is Robert Noyce inventing the chip.

33:34 Love it.

33:36 He's not the only one. He's not the only one. You know, when there is a technological frontier and a ton of money and lots of smart people working, one of the great things about competition and the world, is lots of people are right at the edge thinking similar thoughts. So as Noyce is doing this, in fact, slightly earlier, a thousand miles away, another engineer, a guy named Jack Kilby at Texas Instruments, is also inventing the chip.

33:58 Texas Instruments, famous for their calculators. In the 1970s, that to me was high tech, a Texas Instrument calculator.

34:04 Yes, yes. Also a chip pioneer. And in fact, Kilby came up with the idea just before Noyce, maybe Noyce's idea is a little more elegant. There's, of course, a patent case, Kilby v. Noyce. But in the end, the important thing about this moment in history and this story is the government is going to pay for all the chips everybody can make. There's enough to go around. And Fairchild and Texas Instruments agree to share the intellectual property.

34:30 Amazing. They decide not to destroy each other. Right.

34:33 Like in the Cold War. So Fairchild and Texas Instruments are making chips. They're selling them to the government for ballistic missiles, for Apollo rockets. coming along. And, you know, think of this moment, right? This is like peak nerd in a short sleeve buttoned down with the like heavy rimmed glasses doing the space race, right? This is peak military industrial complex. And I think of the chip as the little hyphen between military and industrial. It's like the center of the military industrial complex.

35:05 Very Tom Wolfe of you.

35:07 So all this government demand is driving more scale. It's pushing more Fairchild and Texas Instruments to come up with more efficiencies, right? And one key thing they're doing is they're figuring out how to put more and more transistors and other components on each piece of silicon, on each chip, so that it gets more powerful and cheaper. And they're pretty good at doing this. They're pretty good at doing this, right?

35:36 We know this. The price falls from $ 1, 000 in the late 50s to $ 25 by 1963. And this moment, the mid-60s, is when we come to what I'm going to call the most unlikely great moment in business history that we have yet encountered in the young life of our show.

35:58 All right, bring it.

35:59 That is the moment in 1965 when the editors of an electronics trade magazine ask Gordon Moore, one of our Traders 8, to write an article. This is the great moment, writing an article for a trade magazine. This electronics trade magazine is called, wait for it, Electronics.

36:17 I love when they have a simple title.

36:19 Business History, a show about the history of business. And Electronics Magazine asks Moore to predict where the integrated circuit business is going to be in 10 years.

36:27 Could be a puff article. But he actually thinks about it.

36:30 He thinks about it. He sees that Fairchild and Texas Instruments are have gotten much better at making integrated circuits that they can put more and more components on each little piece of silicon. And he does the math. He actually makes a little graph and he sees that the number of components on each ship has been basically doubling every year. And at the point he's writing this article, there's somewhere around 60 components. So he figures that's likely to continue. And he just extrapolates. He does the math.

37:00 He extrapolates out his graph, actually makes a little dotted line 10 years out into the future. And he says, OK, we're making 60 or so components on a chip today. In 10 years, it'll be 65,000 components on a chip. The magic of doubling, the magic of compounding.

37:16 I feel like this is the point in business history where we see what happens when you have exponential growth. Thomas Edison made the light bulb better, of course. Everyone made inventions better, but not doubling every year or two years.

37:28 No, this is the central fact about the chip, right? And Moore knows it, crucially, right? Crucially, a huge testament to him and his vision. Here, read this paragraph from this article. He knows what this is going to mean.

37:42 Integrated circuits will lead to such wonders as home computers, or at least terminals connected to a central computer, automatic controls for automobiles, and personal portable communications equipment.

37:56 Wild science fiction-like claims. 1965.

38:01 He's writing this.

38:02 And he's right.

38:03 He's 100% correct.

38:04 So this is the birth of Moore's Law, which Moore himself did not call Moore's Law, which is not a law, but which basically was right, right? In 1975, 10 years later, the year he was predicting out to, he went and looked at how things were going. He was pretty close to right. He realized that progress was slowing down a little.

38:24 He figured doubling two years or so, one of his colleagues was like, no, it's more like 18 months. And so Moore's law was adapted, right? That's what it became. It became the number of essentially transistors eventually on a chip Doubles 18 months. In fact, the rate of increase has started to slow in the past decade or so.

38:41 It's reaching the limit of physics itself.

38:44 Right. There's like, you're at like weird quantum things are happening with the atoms, right? Jensen Wong from NVIDIA basically said Moore's law is dead. Maybe, maybe not. But the key thing here is this doubling and doubling and doubling over many decades that Moore predicted from, you know, 60 or so components on a chip to billions of Of transistors on today's chips. Like, this was, I think clearly, right, certainly the most important business trend of the last hundred years.

39:14 It enabled, obviously, the computing revolution, cell phones, the internet, AI. Like, these key drivers of our world come out of Moore's Law.

39:22 And if you understood Moore's Law, then you could predict... what something could do in 18 months, in three years, in five years, in 10 years. You could start to invent things that literally were not possible today, knowing that the chips will be there when you finish in a year or two.

39:41 Yeah. You see smart entrepreneurs catching onto this and doing this. Like, I mean, the example that comes to my mind is Netflix, right? Which started out as DVDs by mail, which was a great service, but they did not call themselves DVDs by mail, even though when they started Most people didn't have broadband.

39:59 Streaming video was not a thing. But they knew that because of Moore's Law, it was going to be a thing. They knew that would happen, and they planned around it, and it happened. And Gordon Moore basically.

40:11 Saw it coming.

40:12 But, interestingly, around the time he wrote that famous piece, around 1965, Moore and Noyce, our golden boy, were starting to get restless again. You know, they like to shake it up, these guys. They're fundamentally kind of nerd pirates. And they are about to make one more big move after the break. That was the break.

40:58 And now we're back. The story of Silicon Valley.

41:02 So Sherman Fairchild at Fairchild Camera and Instrument, remember our investor in Fairchild, he had exercised his option to buy Fairchild Semiconductor outright in 1959.

41:16 Very shrewd man.

41:17 Shrewd man. Noyce and Moore and the others kept working there. You know, they got some money. They kept working there, kept figuring out how to put more components on a chip. selling all they could make to NASA and the military. But Noyce and Moore start to get this feeling that would really become a classic feeling among Silicon Valley founders who have sold their companies, right? They got a bunch of money.

41:40 Great.

41:41 They weren't really in it for the money, right? What they wanted was to be doing big, important work. They wanted that feeling of, you know, being free out there on the technological frontier like nerd cowboy.

41:52 Yeah, inventing the chip is great. Putting more things on the chip is great. But then it's just scale. It's going from 100 components to 1,000 components to 65,000 components.

42:01 And even that might be fun if you're, like, doing it on your own, right? Yeah. The problem for them was they weren't, right? They were no longer pirates, like you said.

42:10 They were.

42:11 middle managers at a division of Fairchild Camera, right?

42:15 They were going to be the next Bell Labs.

42:17 Yeah, yeah. No, now they're working for a company that makes movie cameras and stamp machines. And they're like, hey, listen... We're going to give stock options to the engineers. And the company in New York is like, no, you're not. Why? Yeah, why? And they're like, okay, but at least we're going to take our profit and put it back into development, right?

42:35 Because things are going so fast. Why?

42:37 Your business, you produce money for the investors.

42:39 Yeah, like the point is to make money for the shareholders. Just be quiet and keep making chips.

42:44 It's so funny, still a 1950s view of what a business was.

42:47 Yeah, that's right. This very kind of man in the gray flannel suit corporation.

42:51 Yeah.

42:52 And so Noyce and Moore don't like this. In 1968, they go back to Arthur Rock, the banker who had helped them get set up with Fairchild about a decade earlier. And crucially, the world is really different now, in large part because of the work that these guys have done, right? Rock, over this time, had gotten into this idea of connecting East Coast capital with these, you know, new companies out on the West Coast. And he'd kind of built on this old tradition that like old money East Coast families had, where like with a little bit of the money on the side, they would sort of play around with what they called adventure capital.

43:34 Adventure capital, yes.

43:35 Right. It's just a little too, can you just tighten that up a little bit? Just a little bit.

43:39 Right.

43:40 So, you know, around this time, Rock and a few other finance types are creating venture capital, right? This is happening. It's going from being a rich man's hobby to into a more formal part of the financial system. And so remember, the first time Noyce and Moore went to rock, it took him months to find the money. And in part, well, obviously in part because Noyce and Moore are way more legit now and they've made the success at Fairchild, but also because finance and capital allocation has developed and venture capital is becoming a thing. Instead of two months this time, he raises the money in two days.

44:16 And remember, this is 1968, right? So the entire... culture of the United States has sort of shifted to the West Coast, not just in terms of technology, but in terms of music and fashion and lifestyle, right? And there's this excitement out there, finally. It's not just farm fields. It's people doing amazing, weird stuff. And I picture these, you know, stuffy, rich people on the East Coast going, hmm, how do we get a little bit involved in what the kids are doing out there on the coast?

44:46 So that's why they raised the money in two days this time. And, you know, the core idea is still this breakthrough that they've had at Fairchild, right? It is the integrated circuit. It is integrated electronics. They know this is going to be huge. And so they're founding their company. It's 1968. And they're like, what if we call it integrated electronics?

45:05 Very nice. Very little nerdy.

45:07 A little long.

45:08 Do it.

45:09 Intel.

45:10 Intel. Beautiful.

45:12 So they create Intel, right? They create Intel. And now, crucially this time, there's no East Coast camera company that can tell Noyce and Moore what to do. Now they can build this engineer's paradise they've been dreaming of. And they do. They build a company where all the engineers get stock options, where it's very non-hierarchical, right? No reserved parking spaces, no fancy offices for the boss. Everybody has the same The plain gray aluminum desks. And remind you, this is 55 years ago and all the pieces are in place.

45:41 Yes. All the things that we think of now as cutting edge Silicon Valley culture, the people going out there now to do AI, right? Yeah. 55 years ago, that's when this got solidified. Yes.

45:51 And it worked, right? They were like, let's build this company. Let's make it centered on engineers and let's have everybody come in every day and try and invent the future. And they succeed, right? Very quickly, they... have a new technological breakthrough that propels them ahead, and Intel remains the dominant chipmaker in the world for decades to come. And interestingly, it's not just Noyce and Moore. Other members of that original traitorous eight also continue to be these kind of restless pirate types. People actually talk about Fair Children, companies that came out of Fair Childs. One of them started AMD, which today is also one of the biggest chip companies in the world.

46:35 And they didn't just start companies. They also, because they made money, became the money people themselves.

46:41 Yeah, yeah. Eugene Kleiner, the guy who called his dad stockbroker when they were originally looking for money, he started a venture capital fund called Kleiner Perkins, which you've probably heard of, because it funded companies like Netscape and Google and Slack.

46:57 Meaning.

46:58 that, you know, these original guys, they didn't just start this company. They didn't just create the model. They actually brought the money to fund generations of people who were restless, who wanted to go out on their own and try a new thing.

47:11 Yeah, if you were a golden boy in the last 55 years, you did not have to work in Philadelphia for an electronics firm. You didn't have to wait for the phone call from anyone, even God, because you knew there was a place that respected your genius and ambition and restlessness, right? And that would overlook whatever personal flaws you might have. There was a place that was on the edge of everything, and it was called Silicon Valley, and you could just go there and make your fortune.

47:42 Next week on Business History. One more guy from Fairchild was the head of sales, starts his own VC firm, and his very first investment was He's in a company full of stoners that's doing business out of an abandoned roller rink.

47:58 It's like the apricot shed of the 70s.

48:01 That company is Atari. And it's the story of the birth of the video game industry.

48:06 Our producer is Gabriel Hunter Chang. Our engineer is Sarah Bruguier. And our showrunner is Ryan Dilley.

48:11 I'm Jacob Goldstein.

48:12 And I'm Robert Smith. We'll be back next week with another episode of Business History.

48:17 A show about the history.

48:19 Wait for it. Of business.