Mark Zuckerberg. Larry Page and Sergey Brin. Steve Jobs. Bill Gates. Jeff Bezos. Everybody recognizes these names. They’re the names behind some of the biggest companies in the world today—Facebook, Google, Apple, Microsoft, Amazon.
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But what about Rex Tillerson? Martin Winterkorn? Liu Zhenya? Khalid al-Falih? No, give up?
They’re all famous country and western singers. Khalid al-Falih is, for example, the King of Rockabilly in the Persian Gulf. He has more number one Country songs in Arabic than Johnny Cash had in English.
Not really, we’re just kiddin’. Those other guys are also current or recent chairmen of some of the biggest companies in the world. Companies like Exxon Mobil, Volkswagen, State Grid and Saudi Aramco Oil Company.
But you’ve never heard of them. For all anyone knows, they could very well be famous Arabic rockabilly singers.
And why is that?
The answer is simple: tech rocks. Tech is cool, innovative and exciting. Tech is creating new businesses out of nothing. Tech is changing the world. Oil is not (except in a really, really bad way). Haven’t you heard: nerd culture is in, being a big oil tycoon is out!
That’s why you’ve heard of Mark Zuckerberg but not Rex Tillerson—even though Exxon’s annual revenue is around $270 billion, and Facebook’s is under $20 billion.
This course is all about the tech world. We’ll look at why tech entrepreneurs are today’s rockstars. We’ll examine the history of startups in Silicon Valley, how Web 1.0 gave way to Web 2.0, and the busts and booms that the tech world has gone through to get where it is today. Along the way we’ll also learn some important things about investing—like why Facebook has a market capitalization that is almost the equivalent of Exxon’s, despite having less than a tenth of its revenue.
So put on your pocket protectors and get ready to learn about the future—because the future already started happening 20 years ago and keeps on happening today.
The History of Silicon Valley
The funny thing about so many industries, is how closely they’re associated with a particular when and where.
For example, the modern car industry belongs to Detroit in the 1900s. The oil industry began in 1859 with the creation of the first modern oil well in Titusville, Pennsylvania. And the telecommunications industry starts in Boston, Massachusetts in 1876, with Alexander Graham Bell.
And the tech industry that is revolutionizing our world today?
Silicon Valley, early 1970s.
Silicon Valley is the popular name given to an area around the San Francisco Bay. It took its name from the development of the silicon-based transistor, which was led by Fairchild Semiconductor, a local Bay area company.
Silicon transistors were the building blocks of the microprocessor, which has made the personal computer possible. Their production in the area, together with presence of the tech-based Stanford Industrial Park, laid the groundwork for what would become (when including the entire San Francisco region) the biggest concentration of high-tech companies in the world.
While microprocessors laid the foundation, it was venture capital that built the industry. In the 1970s, venture capital firms started growing up all around the Valley. They were inspired in part by Stanford University and its engineering faculty, which encouraged faculty and graduates to translate their tech ideas into marketable products.
Venture capitalists fund new businesses with the expectation of long term growth. To learn more, check out our course on Investing in Startups.
They didn’t have to wait very long to achieve success. One of the firms to get its start in the Valley in the seventies was a little garage-based startup called Apple Computer. The founders of Apple—Steve Jobs and Steve Wozniak—had become interested in computers through a local computer club that they joined in 1975. Five years later, Apple launched its $1.3 billion IPO.
That event confirmed that the venture capital industry was very much needed in Silicon Valley. Startup companies with new ideas flocked to the Valley in search of capital to get those ideas off the ground. It was like the gold rush of 1849, but instead of prospectors, San Francisco became the new home of computer geeks and investors alike.
It was here that the modern computer economy got its start, spawning everything from the precursor of the Internet to the development of the computer mouse. Companies like Cisco Systems, Hewlett Packard, Adobe and Intel all settled in the Valley, breathing in the fumes of creativity and getting high off money…lots and lots of money.
From Boom to Bust
The wealth that Silicon Valley generated was astonishing. By the end of the 1980s, as the computer revolution got into full swing, the average income in Silicon Valley was about 50% higher than the average income for the entire country. In addition, the NASDAQ Exchange, which was founded in 1971 and was closely identified with tech companies, grew into what would eventually become the second-largest stock exchange in the world.
And then the Internet happened.
In 1995, the Internet opened up to the world of commerce. In a few short years, it transformed the entire economy, as well as the culture of the world. Names like AOL, Amazon, Craigslist and eBay entered the public’s vocabulary. Startups grew like mushrooms after a rainstorm. Everybody wanted a piece of the action. And the best place to get it was Silicon Valley.
Silicon Valley is more closely associated with the internet boom than any other place on earth. It was here that venture capital provided the seed money for every idea that just about anybody came up with for making money online.
Pet food? Check. Designer clothes? Check. Toys, groceries, online currency? Check! Check! Check!
Most of these ideas were pretty sound. After all, what’s wrong with selling pet food online? It’s profitable for the seller and is convenient for the buyer. Win, win.
But if the ideas were sound, the execution wasn’t. Companies with names like Kozmo.com, Flooz, GeoCities, eToys and—the most notorious of all—Pets.com all had perfectly reasonable ideas to market. But you won’t find them in business today.
The domination of poor business planning and OUTRAGEOUS hype caused these companies to sink like stones.
Take TheGlobe.com, for example. It was an early social media site that allowed people to create their own web pages for display on the site. Not a bad idea. But when the company set its initial share price at $9, and it opened trading at $87 (yes, eighty-seven dollars—a 1,000% jump!!)—clearly people had just lost their marbles.
And along with their marbles, they lost their shirts. The growth in new companies in the latter half of the 1990s became a bubble—a broad-based, massive increase in market capitalization that was unsustainable.
In March of 2000, the NASDAQ Composite reached 5,132.52—a figure that it would still not equal again over 16 years later. Over the next two years, $5 trillion was wiped off the value of stock markets around the world. Internet-based companies collapsed overnight.
Boom had become bust.
From Bust to Boom
When the dotcom bubble burst, it didn’t just destroy speculative startups with no sound business plan. It also dragged down a lot of other, non-speculative companies.
Nortel Networks, for example—the world’s largest maker of telephone switching equipment—was wiped out when the demand for telecommunications systems to run the internet just didn’t materialize. Corning Glass, which was founded in 1851 and manufactured fiber-optic systems for digital data, saw its share drop to 1 dollar. And AOL, which merged with Time-Warner in 2000 in what is widely agreed to be the worst merger in history, effectively disappeared two years later when the new company dropped “AOL” from its name.
When the terrorist attacks of September 11, 2001 occurred, the bust experienced by the NASDAQ a year earlier was replicated by the Dow Jones. Much of the world fell into recession.
A lot of investors who had been affected by the dotcom bubble swore off tech investing altogether. Unfortunately for them they were making another big mistake.
That’s because, like a phoenix, tech was reborn from the ashes. Sure, the early days of the internet had given birth to a lot of silly companies that mesmerized a lot of silly investors. But it also gave birth to a lot of serious companies that would grow into giants.
Amazon was founded in 1994, before the internet even entered public consciousness—and it’s now the most valuable retailer in America, ahead of WalMart in market cap. eBay was born a year later, right at the beginning of the tech boom—and within three years was a multibillion-dollar company that made its revenue from auction fees. Google was born a year after that—and by becoming the world’s number one search engine also became one of the world’s most valuable companies.
In fact, almost half of dotcom companies survived the bubble into 2004, by which time the storm had passed. And thanks to them—as well as the giants like Google—the tech sector has become “normal.” It has steady earnings and growth, and has likely put its growing pains behind it. Ten of the top one hundred companies in America by annual revenue are in fact IT companies—names like Apple, Microsoft, Intel, Cisco.
Thanks to new developments in the world of the internet, bust was to become boom again…
The Social of Wave of Startups
The bursting of the dotcom bubble coincided with the rise of a new phase in the history of the internet: Web 2.0.
The term Web 2.0 was first used in 1999 in an article about user interactivity online. It was popularized five years later at the first Web 2.0 conference, hosted by two new media companies. It referred to the transformation of passive consumers of content during the early years of the internet (Web 1.0) into active creators of content during the coming years (Web 2.0).
Blogs, websites, home pages, podcasts, tags, comments—these were the new content.
You, me, your boss, your grandma, your neighbors, your friends, your enemies—these were the new content creators.
And the new companies delivering this content?
Buzzfeed. Pinterest. Wix. LinkedIn. Reddit. Snapchat. Twitter. And of course, Facebook.
Basically, all the companies that are changing the world we live in as you read this. They are broadly described as social media. And they have turned the world upside down, changing the way we shop and socialize and even organize elections (or revolutions, in the case of the Arab Spring, where Twitter and Facebook played a major role in bringing down governments in Tunisia, Libya and Egypt).
And they’ve been joined by the companies of the “sharing economy:” Startups like Uber, the ride-hailing service that is tearing the taxi business to shreds all around the world; or Airbnb, the network that lets people rent out their properties to travelers, and that is giving the hotel industry nightmares.
These companies have attracted huge amounts of interest, excitement, controversy…and money. Yes, just like we’re now in the world of Web 2.0, we’re also in the world of Tech Startups 2.0. The explosion of mobile technology—symbolized by the iPhone and Apple’s rise to become the most valuable company in the world—combined with social media has ignited a new era in venture capital.
The poster boy for this new era is Facebook, whose IPO took place in 2012. Ironically, it was a big flop—but the buzz it generated, and the rebound in the share price after a long dip, signaled to the world that investors were ready once again to make big bets on new companies.