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How did venture capital replace government funding as a major source of start-up financing?

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Map of Silicon Valley with colored markers showing tech locations: blue historically important offices, green HQs, orange offices, and purple clusters across the Bay Area. — Silicon Valley Silicon Valley highlighting key historic tech offices, major tech headquarters, and offices with headquarters elsewhere.

In the early years of Silicon Valley, the U.S. government served as the primary source of financing, largely through military research contracts that supported the region's development. By the early 1960s, the military accounted for more than 50 percent of semiconductor sales.123

However, a fundamental shift occurred in the late 1960s and early 1970s as the market for semiconductors expanded beyond military needs into consumer applications. As the demand for commercial and consumer-oriented technology grew, the reliance on government funding diminished; by 1972, the military share of semiconductor sales had dropped to 12 percent.1

By the mid-1970s, venture capital had replaced the government as the primary source of financing for start-ups. This transition was facilitated by a local culture where successful entrepreneurs returned to the region as venture capitalists, reinvesting their wealth and expertise into new enterprises. This ecosystem allowed for rapid business formation, where entrepreneurs could secure funding, rent space, and begin operations within weeks. While government contracts were crucial to the region's "childhood and adolescence," venture capital became the "lifeblood" of the Valley's subsequent growth.12