*This article was originally published in collaboration with Compound as part of their new content initiative: “The Archive”.*
As Samuel Morse’s telegraph started transmitting messages in the 1840s, the New York Herald proclaimed that “space and time are annihilated”. Much like the bold assertions at the start of COVID-19 about how Zoom would eliminate all business travel, that journalist’s prediction missed the mark.
Optimistic projections about technology and the future often fall short because they ignore humans’ need to congregate. If a telegraph and other innovations annihilate time and space, why do people still choose to live in cities that are dirty, exorbitantly expensive, more dangerous, and cramped? The answer is easy: social benefits and the advantages of proximity. From a business perspective, research shows that social proximity is a key factor for innovation.
“Researchers in geography and urban economics… have accumulated substantial evidence that geographical proximity between the people and the organizations that produce knowledge remains central to their ability to stay innovative. Case studies of innovative sectors such as biotechnology, semiconductor, aerospace, and media reveal that clustering is a common phenomenon.”
– JW Sonn, M. Storper, ‘The Increasing Importance of Geographical Proximity in Knowledge Production’
Great leaders like Steve Jobs have recognized this and meticulously designed workspaces to boost collaboration. As Pixar CEO, Jobs famously designed their office park in ways that encouraged cross-department collaboration. He believed:
“If a building doesn’t encourage [collaboration], you’ll lose a lot of innovation and the magic that’s sparked by serendipity. So we designed the building to make people get out of their offices and mingle in the central atrium with people they might not otherwise see.” – Steve Jobs
The same principles apply to cities, where thousands of bright minds congregate, facilitating innovations. This is why there are cities dominating specific professions (i.e., Hollywood, DC, NYC, Silicon Valley). Cities are the incubators of innovation, which brings us to the focus of this paper: the past and future of innovation “hubs” like Silicon Valley.
The 19th-Century Silicon Valley: Cleveland
Though hard to believe today, 19th-century Cleveland was a manufacturing powerhouse and cluster of innovation. It is said that “geography is destiny”, and Cleveland’s positioning on Lake Erie greatly benefitted the city after the Erie Canal was completed in 1825. The canal linked Lake Erie with the Atlantic Ocean, making cities on Lake Erie like Cleveland important ports. Additionally, Cleveland’s proximity to the iron ore of Lake Superior meant that iron and steel quickly became the city’s most important industries. Following the Civil War, Cuyahoga county’s (where Cleveland is located) manufacturing truly exploded:
Inventors, Patents & Cleveland’s Startup Scene
Cleveland’s ascension also coincided with the Second Industrial Revolution (1870-1914), a period in which inventive activity soared as innovations like electricity, the light bulb, and Alexander Graham Bell’s telephone changed society. (Source: US PTO)
As Cleveland’s manufacturing output and industrial prowess grew, inventors were drawn to the city. Historians argue that by 1900 Cleveland was the fifth most technologically important city in America.
With a growing number of local inventors and entrepreneurs focusing on “high-tech” industries like electricity and machinery, Cleveland slowly established itself as an “innovation hub” like Silicon Valley today.
The Birth of Brush Electric & The Spark of Cleveland’s Technology Boom
The Brush Electric Company’s story begins with the Telegraph Supply Company, a Cleveland tech startup formed to commercialize founder George B. Hick’s invention, a “telegraph repeater” allowing messages to travel farther. Local businessman George Stockly purchased a substantial stake in Hick’s company in 1872, promising to oversee the company’s commercial operations.
Unfortunately, the investment started poorly as Hick died suddenly after Stockly started. Without any technical expertise himself, Stockly leveraged the local Cleveland network to find expert hires. Importantly, Stockly also made a concerted effort to ingratiate himself with Cleveland’s promising young inventors by networking and offering jobs at Telegraph Supply Company. (Lamoreaux, Leventein, Sokoloff)
These interactions with local inventors paid off when Stockly met Charles Brush, “whose invention of an arc-lighting system would spark Cleveland’s technology boom” (Lamoreaux, Leventein, Sokoloff). Brush himself was not an expert on telegraph repeaters but had long been interested in the possibilities of electricity, particularly lighting systems. Stockly offered Charles Brush the use of Telegraph Supply’s facilities to work on Brush’s lighting inventions and research, like a modern “incubator”.
Stockly’s faith was rewarded after Brush successfully invented an innovative “arc-lighting system” that would illuminate America (shown below).
This dramatic unveiling of Brush’s invention produced a wave of interest and orders. Stockly and Telegraph Supply’s other directors realized that the company’s future was in Brush’s arc-lighting system, and re-organized as “The Brush Electric Company” in 1880. During the 1880s, Brush Electric “installed about 80% of the nation’s arc-lighting systems.” The company’s early backers became fantastically rich, and Brush himself was earning $200,000 ($5.4 million today) a year from royalties (Lamoreaux, Leventein, Sokoloff).
The Brush Electric Incubator
As mentioned, the success of Brush Electric truly transformed Cleveland into an innovation “hub” for inventors, entrepreneurs, and capital. The company garnered national attention for Cleveland from business professionals looking to discover Cleveland’s “next Brush Electric”. Similarly, for young inventors, the story of Charles Brush demonstrated the benefits of collaborating with others in Cleveland’s technology community. Like Brush had utilized Telegraph Supply’s facilities, other young inventors flocked to Brush Electric’s headquarters in search of similar support.
Before long, Brush Electric was operating a fully functioning startup incubator. Young inventors showing promise were invited to work at Brush Electric’s facilities, and in some cases, received financial backing from the company itself. When inventions proved successful, Brush Electric usually received monetary compensation in the form of favorable contracts or licensing agreements.
The Baker Motor Vehicle Company underscores the level of innovation occurring at Brush. During the 1890s, Walter C. Baker successfully invented his electric vehicle while working at Brush Electric’s Cleveland headquarters. The Baker Electric was one of the most successful electric vehicle companies of this era, and even the car of choice for Henry Ford’s wife (Lamoreaux, Leventein, Sokoloff).
For those lucky enough to work at Brush Electric’s facilities, an association with this successful company was a significant stamp of approval in the community. Business professionals seeking the next Brush Electric could feel confident about backing an inventor that had been deemed worthy by Brush Electric itself.
There are countless examples demonstrating that ex-Brush Electric employees or inventors in its unofficial incubator could raise capital more easily because of their association with Brush Electric. For example, in the 1880s Edward Bentley and Walter Knight’s work on electrically powered streetcars, and prominent association with Brush Electric, convinced the East Cleveland Railway Company to invest in their streetcar systems (Lamoreaux, Leventein, Sokoloff). This was the 19th-century equivalent of investing in the startups of “ex-Googlers”.
“Entrepreneurs who organized and promoted these new ventures secured investment capital largely by relying on personal connections. These could be familial…they could result from friendships…or they could be based on the recommendations of men who had established their expertise in the community… In all of these cases, however, validation of the technology by experts connected with the hub was crucial to the inventors’ ability to mobilize capital. In addition, association with a hub enterprise could in and of itself be a means of attracting both attention and funds.”
-Lamoreaux, Leventein, Sokoloff
In contrast with the venture capital industry today, investors in Cleveland’s technology startups were more interested in obtaining a return on their investments through long-term growth and dividends as opposed to “exits” via IPO or buyout. This had potentially interesting implications for the incentives of Cleveland inventors and business community.
Since the primary source of funding came from within Cleveland’s tech ecosystem itself, inventors and entrepreneurs were incentivized to collaborate more. Many companies were formed within Brush Electric and either received investments from other ex-Brush Electric inventors/employees or merged with other companies that also started at Brush Electric.
Like Steve Job’s design for Pixar’s office park, Brush Electric recognized the value of fostering a collaborative community. The close-knit tech community in Cleveland and at Brush Electric specifically highlights the impact of social proximity and interaction on innovation.
Silicon Valley & The Future of Innovation Hubs
The story of Cleveland’s 19th-century innovation hub presents obvious parallels to Silicon Valley today. Like Cleveland’s technology boom stemmed from the success of Brush Electric and its subsequent “incubator”, Silicon Valley’s roots can be traced to a similar network fostered by Stanford university:
“All of the energetic scientists were forming around Stanford. The reason for that, in my opinion…is because of Fred Terman. He was the head of the engineering school at Stanford, and he encouraged his students, especially the doctoral and post-doctoral students, to form companies and continue to teach at Stanford. That was an unknown concept at any other school in those days—it certainly wasn’t happening at MIT, Harvard or Princeton, or any of the good engineering schools. People got fired from MIT in those days if they started companies.”
–Arthur Rock, ‘Harvard Business School, Done Deals: Venture Capitalists Tell Their Story: Featured HBS Arthur Rock’ (2000)
Fred Terman, the “Father of Silicon Valley”, recognized the potential power that collaboration between Stanford University’s academic community and local entrepreneurs could have. To that end, Terman created novel institutions like the Stanford Industrial Park (now Stanford Research Park) in 1951, which was the first university-owned industrial park. Operating on campus, the Park became home to companies like Hewlett-Packard, Varian Associates, and more. Like Brush Electric, the Stanford Industrial Park was a hub for inventors, entrepreneurs, and business professionals to collaborate and fund innovative companies. More recently, Facebook’s platform grew from 20 million users to 750 million while headquartered at Stanford Research Park.
The Role of Capital in Silicon Valley’s Hub
The above quote on Stanford Industrial Park came from Arthur Rock, one of the first major venture capitalists, and credited by many to have first popularized the term “venture capital.” Outside of Stanford, Rock was pivotal to creating the corporate equivalent of Brush Electric in 20th-century Silicon Valley: Fairchild Semiconductors.
The condensed version of Fairchild Semiconductors’ history begins with eight unhappy scientists employed at Shockley Semiconductors in California. Dissatisfied with the management style of their boss, William Shockley, these eight dissatisfied scientists wished to find a new employer that would hire them as a group. One of the scientist’s fathers was a client of Hayden Stone, an investment firm in New York. This scientist, Eugene Kleiner, wrote to Hayden Stone inquiring whether the firm might know someone interested in hiring the group.
Hayden Stone sent an employee, Arthur Rock, to meet with these eight scientists. After meeting with and being impressed by the group, Rock eventually helped connect the scientists with one Sherman Fairchild, the largest shareholder of IBM at the time. Fairchild struck a deal with the eight scientists and Hayden Stone took a 7.5% stake in the new venture.
This deal was transformative for the development of Silicon Valley. In fact, the name “Silicon Valley” itself was coined by a Fairchild Semiconductor publicist in a 1971 news article.
Today the group of scientists that founded Fairchild Semiconductors – known as “the traitorous eight” – are credited with the birth of Silicon Valley. Like Brush Electric, Fairchild Semiconductors led to the creation of dozens of successful companies over the following decades.
The incredible success of Fairchild Semiconductors was enough evidence for Arthur Rock to launch a new limited partnership for investing in startups with partner Thomas Davis Jr., a San Francisco lawyer and financier that had been mentored by none other than Stanford’s Fred Terman. Following the success of Davis & Rock’s early investments, the formation of new venture capital firms intensified. The firm’s investment in Scientific Data Systems, for example, reportedly returned 380x its money.
New firms were founded by other Silicon Valley insiders, including members of the “traitorous eight”, like Eugene Kleiner. Eugene teamed up with investor Tom Perkins to launch “Kleiner & Perkins” in 1972. Today, Kleiner Perkins remains one of the most well-known and widely respected venture capital firms in operation.
Unlike 19th-century Cleveland, the role of formal financial institutions was and is significant in Silicon Valley. From its early beginnings, the growth of this innovation hub has been closely tied to the development of venture capital firms alongside it. This is an important distinction because it means that Silicon Valley is not only the hub for startups and innovative companies, but also the financing hub for such companies. This amplifies the draw of Silicon Valley for aspiring entrepreneurs and reinforces the hub’s hegemony.
The Path Forward: Silicon Valley & The Future of Innovation Hubs
More than six decades after the creation of Stanford Industrial Park and Fairchild Semiconductors, Silicon Valley’s innovation hub remains second to none. However, trends in recent years demonstrate that Silicon Valley’s status as the only major innovation hub may be waning. This is not to dramatically predict a “downfall of Silicon Valley”, but rather a proliferation of other innovation hubs around the United States (and world).
The COVID-19 pandemic opened many people’s eyes to the fact that geographical limitations were loosening as video conferencing and other remote-work tools became more commonplace. Although social proximity is still critical for innovation and collaboration, meaning (in-person) innovation hubs are unlikely to disappear, technology can open opportunities for entrepreneurs and inventors located outside of the dominant hubs like Silicon Valley.
That said, Pitchbook data shows that the pandemic has accelerated a trend already unfolding pre-COVID:
So, what does this mean? Silicon Valley has been the dominant innovation hub for so long that it is hard to envision a world in which it is not. The concentration of venture capital financing in Silicon Valley makes it a more powerful hub than 19th-century Cleveland, but the data above shows that startups outside of the Bay Area are starting to eat away at that source of funding.
An alternative future may be one in which capital remains in legacy hubs like Silicon Valley, but companies themselves do not relocate to Silicon Valley, staying back to foster the creation of innovation hubs and ecosystems in their own local cities. The data below shows that investment dollars are increasingly flowing out of the major innovation hubs and into other regions.
Another pandemic-accelerated trend impacting the future of innovation hubs is remote work. Interestingly, the history of automobiles provides insight on what this distribution of human capital outside of cities might look like going forward.
In the early 20th century, when Henry Ford’s Model Ts were rolling off production lines, the structure of American home and work life dramatically changed. For example, city “suburbs” were a direct consequence of automobiles, as transportation enabled employees to live further away from their job and commute into the office.
“When the price on the Model-T dropped many common people were able to afford an automobile. This led to the development of suburbs since people could commute into the cities for work. The automobile also gave people the opportunity to spread out across rural areas because farmers no longer needed to be within carriage distance of a port or train… These new environments created by the automobile changed how America lived and how people interacted with one another… New jobs opened up in factories, convenience stores, gas stations, state police, highway construction and many other fields.” (The Automobile)
Today, video-conferencing and other remote-working tools are enabling a similar diffusion of human capital and talent across America (and world) as COVID-19 opened employers’ eyes to the fact that remote work did not necessarily lead to a drop-off in productivity.
Remote work has potentially significant ramifications for the creation of innovation hubs because it means that regions outside of the classic “hubs” (i.e., Silicon Valley) will experience less of a “brain drain” as smart local talent leaves for bigger innovation hubs. This trend is reflected by hiring data from leading companies like Coinbase and Stripe. In Q4 2021, 89% of Coinbase’s new hires were outside of the Bay Area, and 74% of Stripe’s new hires were outside of the Bay Area and Seattle.
With talented entrepreneurs and engineers residing outside of the classic innovation hubs like Silicon Valley, replicating the strategies of Brush Electric and Fred Terman’s Stanford to boost collaboration will be key for transforming these local “communities” into true innovation hubs.
Silicon Valley’s dominance is unlikely to subside any time soon, but its status as the only major innovation hub may be under threat.
It was famously said that “talent is equally distributed, opportunity is not.” Hopefully, this is starting to change.