![]() Many things went right for Silicon Valley during this time and explain why it overtook Boston as the center of tech innovation. By 1992, the West Coast was receiving 48 percent of venture investment money. But as opportunities for investment expanded, so did the funds. At first, the two Menlo Park–based firms were relatively small. Most of the private action-and money-was on the East Coast, especially in the Boston area, where the early venture funds got their start.īut in the late 1960s and early 1970s, venture firms went west: Kleiner Perkins (then Kleiner, Perkins, Caufield & Byers) was founded in 1972, the same year as Sequoia. ![]() By the early 1970s, Silicon Valley was boasting lots of technology firms, but entrepreneurship had yet to explode: those early tech firms depended on government contracts. A critical part of the Silicon Valley environment was the venture capital industry that grew alongside it. Low and stable inflation also resulted in lower rates because investors needed less yield to see a positive real return, and less inflation meant less risk in bond investing.Īnd low rates were good for risky investments in startups, the bread-and-butter of venture capital firms. assets, especially from foreign governments looking to manage their currencies and stash excess savings. More globalization fed the demand for U.S. Federal Reserve policy was more accommodative. Silicon Valley’s ascent coincided with a fall in global interest rates, which started in the mid-1980s, for various reasons. ![]() Even though tech firms’ deposits are insured, a bailout can’t solve the deeper problem that we are in a higher interest-rate environment-and that means the days of easy money in the Valley are over. ![]() The money stopped flowing because of rising interest rates. The bank realized that it was in trouble when depositors, tech firms, and start-ups started pulling out their deposits because they needed the money to fund operations when their financing dried up. The failure of the bank and its poor risk management is getting all the headlines, but it started with a deeper issue that will pose more problems for the Valley in the years ahead. The first shoe to drop could be the collapse of Silicon Valley Bank. Investment firms willing and able to supply that capital were a big part of what created Silicon Valley. For an innovative ecosystem to work, you need stars to align, yes but also critical is cheap, easy access to capital. What ultimately kills the magic, though, may be rising interest rates. Now, reeling from an absurdly high cost of housing, sky-high taxes, and worsening crime and disorder-all of which make living and running a business there far less compelling-Silicon Valley may be seeing its magic wane. And as many well-intentioned policymakers discovered, these places are both hard to replicate and fragile to maintain. Such innovation hotbeds, from the Renaissance in Florence to the Enlightenment in Britain, have played an enormous role in economic history. It’s special and rare when the most creative and talented people come from around the world to a location to build new things. Some of the copycats were more successful than others, but none achieved the magic of the original. One thinks of Silicon Glen (Scotland), Silicon Saxony (Germans tend to be literal), Silicon Taiga (Russia), Silicon Wadi (Israel), and Silicon Mountain (Cameroon), among others. At economic development conferences over the last 20 years, the conversation frequently turned to the same question: How can we create our own Silicon Valley? And many countries and cities claimed that they had.
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