but it worked best with cloud software, which could be updated as often as necessary. The first major industry created with the new model was social media, the Web 2.0 startups that were building networks of people rather than pages. Every day after launch, founders would study the data and tweak the product in response to customer feedback. In the lean startup philosophy, the product is never finished. It can always be improved. No matter how rapidly a startup grew, AWS could handle the load, as it demonstrated in supporting the phenomenal growth of Netflix. What in earlier generations would have required an army of experienced engineers could now be accomplished by relatively inexperienced engineers with an email to AWS. Infrastructure that used to require a huge capital investment could now be leased on a monthly basis. If the product did not take off, the cost of failure was negligible, particularly in comparison to the years before 2000. If the product found a market, the founders had alternatives. They could raise venture capital on favorable terms, hire a bigger team, improve the product, and spend to acquire more users. Or they could do what the founders of Instagram and WhatsApp would eventually do: sell out for billions with only a handful of employees.
Facebook’s motto—“Move fast and break things”—embodies the lean startup philosophy. Forget strategy. Pull together a few friends, make a product you like, and try it in the market. Make mistakes, fix them, repeat. For venture investors, the lean startup model was a godsend. It allowed venture capitalists to identify losers and kill them before they burned through much cash. Winners were so valuable that a fund needed only one to provide a great return.
When hardware and networks act as limiters, software must be elegant. Engineers sacrifice frills to maximize performance. The no-frills design of Google’s search bar made a huge difference in the early days, providing a competitive advantage relative to Excite, Altavista, and Yahoo. A decade earlier, Microsoft’s early versions of Windows failed in part because hardware in that era could not handle the processing demands imposed by the design. By 2004, every PC had processing power to spare. Wired networks could handle video. Facebook’s design outperformed MySpace in almost every dimension, providing a relative advantage, but the company did not face the fundamental challenges that had prevailed even a decade earlier. Engineers had enough processing power, storage, and network bandwidth to change the world, at least on PCs. Programming still rewarded genius and creativity, but an entrepreneur like Zuck did not need a team of experienced engineers with systems expertise to execute a business plan. For a founder in his early twenties, this was a lucky break. Zuck could build a team of people his own age and mold them. Unlike Google, Facebook was reluctant to hire people with experience. Inexperience went from being a barrier to being an advantage, as it kept labor costs low and made it possible for a young man in his twenties to be an effective CEO. The people in Zuck’s inner circle bought into his vision without reservation, and they conveyed that vision to the rank-and-file engineers. On its own terms, Facebook’s human resources strategy worked exceptionally well. The company exceeded its goals year after year, creating massive wealth for its shareholders, but especially for Zuck. The success of Facebook’s strategy had a profound impact on the human resources culture of Silicon Valley startups.
In the early days of Silicon Valley, software engineers generally came from the computer science and electrical engineering programs at MIT, Caltech, and Carnegie Mellon. By the late seventies, Berkeley and Stanford had joined the top tier. They were followed in the mid-nineties by the University of Illinois at Urbana-Champaign, the alma mater of Marc Andreessen, and other universities with strong computer science programs. After 2000, programmers were coming from just about every university in America, including Harvard.
When faced with a surplus for the first time, engineers had new and exciting options. The wave of startups launched after 2003 could have applied surplus processing, memory, storage, and bandwidth to improve users’ well-being and happiness, for example. A few people tried, which is what led to the creation of the Siri personal assistant, among other things. The most successful entrepreneurs took a different path. They recognized that the penetration of broadband might enable them to build global consumer technology brands very quickly, so they opted for maximum scale. To grow as fast as possible, they did everything they could to eliminate friction like purchase prices, criticism, and regulation. Products were free, criticism and privacy norms ignored. Faced with the choice between asking permission or begging forgiveness, entrepreneurs embraced the latter. For some startups, challenging authority was central to their culture. To maximize both engagement and revenues, Web 2.0 startups focused their technology on the weakest elements of human psychology. They set out to create habits, evolved habits into addictions, and laid the groundwork for giant fortunes.
The second important change was philosophical. American business philosophy was becoming more and more proudly libertarian, nowhere more so than in Silicon Valley. The United States had beaten the Depression and won World War II through collective action. As a country, we subordinated the individual to the collective good, and it worked really well. When the Second World War ended, the US economy prospered by rebuilding the rest of the world. Among the many peacetime benefits was the emergence of a prosperous middle class. Tax rates were high, but few people complained. Collective action enabled the country to build the best public education system in the world, as well as the interstate highway system, and to send men to the moon. The average American enjoyed an exceptionally high standard of living.
Then came the 1973 oil crisis, when the Organization of Petroleum Exporting Countries initiated a boycott of countries that supported Israel in the Yom Kippur War. The oil embargo exposed a flaw in the US economy: it was built on cheap oil. The country had lived beyond its means for most of the sixties, borrowing aggressively to pay for the war in Vietnam and the Great Society social programs, which made it vulnerable. When rising oil prices triggered inflation and economic stagnation, the country transitioned into a new philosophical regime.
The winner was libertarianism, which prioritized the individual over the collective good. It might be framed as “you are responsible only for yourself.” As the opposite of collectivism, libertarianism is a philosophy that can trace its roots to the frontier years of the American West. In the modern context, it is closely tied to the belief that markets are always the best way to allocate resources. Under libertarianism, no one needs to feel guilty about ambition or greed. Disruption can be a strategy, not just a consequence. You can imagine how attractive a philosophy that absolves practitioners of responsibility for the impact of their actions on others would be to entrepreneurs and investors in Silicon Valley. They embraced it. You could be a hacker, a rebel against authority, and people would reward you for it. Unstated was the leverage the philosophy conferred on those who started with advantages. The well-born and lucky could attribute their success to hard work and talent, while blaming the less advantaged for not working hard enough or being untalented. Many libertarian entrepreneurs brag about the “meritocracy” inside their companies. Meritocracy sounds like a great thing, but in practice there are serious issues with Silicon Valley’s version of it. If contributions to corporate success define merit when a company is small and has a homogeneous employee base, then meritocracy will encourage the hiring of people with similar backgrounds and experience. If the company is not careful, this will lead to a homogeneous workforce as the company grows. For internet platforms, this means an employee base consisting overwhelmingly of white and Asian males in their twenties and thirties. This can have an impact on product design. For example, Google’s facial-recognition software had problems recognizing people of color, possibly reflecting a lack of diversity in the development team. Homogeneity narrows the range of acceptable ideas and, in the case of Facebook, may have contributed to a work environment that emphasizes conformity. The extraordinary lack of diversity in Silicon Valley may reflect the pervasive embrace of libertarian philosophy. Zuck’s early investor and mentor Peter Thiel is an outspoken advocate for libertarian values.
The third big change was economic, and it was a natural extension of libertarian philosophy. Neoliberalism stipulated that markets should replace government as the rule setter for economic activity. President Ronald Reagan framed neoliberalism with his assertion that “government is not the solution to our problem; it is the problem.” Beginning in 1981, the Reagan administration began removing regulations on business. He restored confidence, which unleashed a big increase in investment and economic activity. By 1982, Wall Street bought into the idea, and stocks began to rise. Reagan called it Morning in America. The problems—stagnant