What Silicon Valley can learn from the rise and fall of its original tech startup.

Hewlett-Packard co-founder Bill Hewlett on June 6, 1977
Hewlett-Packard co-founder Bill Hewlett on June 6, 1977.

Photo by Bill Johnson/The Denver Post/MediaNews Group/Getty Images

It started with two engineers tinkering in a Silicon Valley garage. Behind brilliant ideas and a distinctive corporate culture, it grew into one of the most successful technology companies of all time.

That’s true of both Apple and Google. It’s also true of Hewlett-Packard—a company that predated them by some 40 and 60 years, respectively.*

HP today is a broken shell of its former self. The seeds of its downfall were sown decades ago, when its focus shifted from high-end innovation to mass production of low-cost devices. On Monday, CEO Meg Whitman announced that it’s splitting into two companies: HP Inc. will hawk computers and printers while Hewlett-Packard Enterprise will focus on high-end business hardware and software, like IBM. It’s the second time in 15 years the company has spun off a core business—it turned its test and measurement division into Agilent in 1999, and it has been reeling ever since.

In its time, however, Hewlett-Packard was like nothing the business world had seen. It was, in many respects, the prototype from which the idea of the Silicon Valley startup sprang. Its former glory and longevity are worth recalling in an age when the potential for tech companies to strike it rich is taken for granted—and so is their evanescence.

The outlines of HP’s history have been well-traced, including by Michael S. Malone in Bill & Dave: How Hewlett and Packard Built the World’s Greatest Company, and by co-founder David Packard himself in The HP Way: How Bill Hewlett and I Built Our Business. The two met as undergrads at Stanford University under the tutelage of the legendary electrical engineering professor Frederick Terman; in 1939, at Terman’s urging, they formed their own company in a one-car garage on Addison Avenue in Palo Alto, California, then a sleepy suburb known more for fruit orchards than industry.

The newly renovated HP garage on Addison Avenue is seen Dec. 8, 2005, in Palo Alto, California
The newly renovated HP garage on Addison Avenue is seen Dec. 8, 2005, in Palo Alto, California.

Photo by David Paul Morris/Getty Images

Like a lot of tech startups today, Hewlett and Packard decided to start a company before they knew what it was they wanted to build.  They considered everything from medical equipment to air-conditioning control systems before settling on an audio oscillator that they managed to sell to Walt Disney, who used the devices in producing the soundtrack for Fantasia.

The founders were driven not by a particular business model or million-dollar idea, but by the conviction that, in Packard’s words, “we were able to design and make instruments which were not yet available.” The company’s subsequent products established it as a leader in instruments for measuring and testing electronic signals and devices.

By World War II, the company was scaling up rapidly to win and fulfill government contracts for its oscillators and vacuum-tube voltmeters. Out of necessity was born a corporate culture that would come to define Silicon Valley startups in the ensuing decades. As Walter Isaacson recounts in his new book The Innovators, citing Malone:

While Bill Hewlett was in the military, Dave Packard slept on a cot at the office many nights and managed three shifts of workers, many of them women. He realized, partly out of necessity, that it helped to give his workers flexible hours and plenty of leeway in determining how to accomplish their objectives. The management hierarchy was flattened. During the 1950s this approach merged with the casual lifestyle of California to create a culture that included Friday beer bashes, flexible hours, and stock options.

Over the years this approach coalesced in a management philosophy known as “the HP Way.” It emphasized problem-solving over profit-chasing and trust in employees over top-down management. It became a blueprint for the semiconductor industry, and then Intel, and ultimately the technology industry as a whole. The company made money—piles and piles of it—but it did it by continually inventing and honing useful products, not by maximizing volume and slashing costs.

“HP’s cultural legacy runs very, very deep,” Leslie Berlin, historian for the Silicon Valley Archives at Stanford, told me in a phone interview Monday. “The notion that literally a couple of tech guys in a garage could not only make it, but hit the ball out of the park—and that they did it without alienating their labor—it really helped to kick-start the Valley.” Berlin hears echoes of “the HP Way” in Google’s corporate motto, “Don’t be evil,” as well as in the company’s seemingly utopian corporate culture.

Malone, author of books about both Hewlett-Packard and Intel, agreed in a phone interview that HP was in many ways “the founding company of Silicon Valley.” But in other respects, he told me, it has always stood apart, whether due to the nature of its business or the magnitude of its success. While semiconductor and microchip companies—and, later, Internet startups—duked it out in cutthroat competition on the Valley floor, HP shone as a gold-paved citadel in the foothills where happy, healthy, lifelong employees settled in and raised families.

Hewlett and Packard may have treated their workers humanely, but they were unsentimental when it came to the company’s products and business models. “As early as the mid-1950s, an internal HP study showed that sales of most of the company’s products declined in the fourth or fifth year as their technological advantage slipped,” reported David Jacobson in a 1998 Stanford Magazine cover story. “So, in order to grow, the company had to generate an increasing amount of its revenues from newer ideas.” In a 2000 Forbes article, Malone elaborated:

The key to the greatness of Bill Hewlett and David Packard was that they held no attachment to things, only people. The garage was left behind, as would be, in time, the redwood building. So too was the audio oscillator and thousands of other products—all abandoned in the endless pursuit of something better. Only the people remained, and they were cherished and respected.  

It’s hard to say just when the company began to lose the edge that its founders and their successors had been so careful to keep sharp. Some analysts pin the turning point on the tumultuous tenure of former CEO Carly Fiorina, who came to the company with a background in sales rather than engineering and orchestrated its acquisition of Compaq in 2002. Critics say she doubled down on the company’s maturing PC-sales business at the expense of more forward-looking products. Others fault her hard-charging successor, Mark Hurd, who pushed the company to tremendous profits through aggressive management and ruthless cost-cutting. The strategic flailing and soap-opera board intrigue that characterized Léo Apotheker’s 11-month reign certainly didn’t help.

Most agree, however, that the company had grown sclerotic and unwieldy even before Fiorina arrived. In a 2005 foreword to Packard’s book, Jim Collins wrote that HP in the 1990s “confused operating practices with core values” and “veered off course” with acquisitions whose success depended on cost-cutting and market share rather than technical innovation.

While the latest split-up may sound like a death knell, Malone believes it gives Whitman a chance to reshape Hewlett-Packard Enterprise in the mold of IBM, which sold its PC business to Lenovo in 2005. But even if that’s the case, it’s clear by now that the HP of old is not coming back.

For a time, though, all of the virtues of Silicon Valley at its best came together in a company that was at once wildly profitable and universally beloved. “Between 1955 and about 1965, HP was probably the greatest company ever,” Malone said. “It produced the kind of innovation you saw from Apple in the 2000s, but it was simultaneously the most enlightened employer in the country. They had the highest employee morale levels ever measured.”

In 1955, Hewlett-Packard was 16 years old. It has been 17 years since Steve Jobs retook the reins at Apple and remade the company in his image. And Google turned 16 years old this year.

*Correction, Oct. 8, 2014: This article originally implied that Hewlett-Packard predated Google by about 40 years and Apple by about 60. In fact, it predated Apple by about 40 years and Google by about 60.