#203 Georges Doriot Birth of Venture Capital

Summary Notes


In "Creative Capital: George Doriot and the Birth of Venture Capital," Spencer E. Ante chronicles the transformative influence of George Doriot on the venture capital industry. Doriot, a Harvard professor and military general, founded American Research and Development Corporation (ARD) in 1946, pioneering professional venture financing. Despite initial skepticism and regulatory battles, Doriot's tenacity and belief in nurturing startups led to ARD's monumental success with Digital Equipment Corporation (DEC), yielding a return of over 70,000%. Doriot's philosophy emphasized the long-term growth of well-managed firms and the importance of supporting visionary entrepreneurs. His legacy as the father of venture capital demonstrates the profound impact of patient investment in innovation, reshaping the financial world and fostering a new economy built on entrepreneurship.

Summary Notes

Emergence of Venture Capital

  • Venture capital transformed into a professional, large-scale industry in the second half of the 20th century.
  • George Doriot was a pivotal figure in this transformation.
  • Doriot is recognized as the founder of the modern venture capital (VC) industry and the first to run an institutional VC fund.
  • He emphasized the VC community as a real industry.
  • American Research and Development Corporation (ARDC), founded by Doriot in 1946, was the first public VC firm and was based in Boston.
  • ARDC financed over 100 startups, leading to technological and business advancements.
  • Doriot's investments included companies in the computer, medical devices, and desalination machine industries, as well as George H. W. Bush's first company, Zapata Offshore.

"The venture capital industry began to take shape after World War II on the northeastern seaboard when in 1946, Dorio became president of the first public venture capital firm, Boston based american research and development Corporation."

This quote highlights the historical significance of George Doriot and ARDC in the foundation of the venture capital industry post-World War II.

Influence of George Doriot

  • Doriot is noted for his charisma and influential role in shaping venture capital.
  • The book "Creative Capital: George Doriot and the Birth of Venture Capital" by Spencer E. Ante is a source of insight into Doriot's life and impact.
  • Doriot's approach to financing entrepreneurs was groundbreaking and organized.
  • His teachings at Harvard Business School were influential and spanned across generations of business executives.

"He was very important because he was the first one to believe there was a future in financing entrepreneurs in an organized way."

The quote encapsulates Doriot's pioneering belief in the potential of organized financing for entrepreneurs, which was a novel concept at the time.

Comparison with the Rothschild Family

  • The Rothschild family's creation of a new asset class through the modern bond market is paralleled with Doriot's venture capital innovation.
  • The Rothschild's financial strategies and the inception of the international bond market are discussed in Neil Ferguson's book "The House of Rothschilds."
  • The concept of inventing new asset classes and accumulating valuable assets within them is explored.

"By pioneering the creation of the modern bond market, enabling british investors to buy internationally tradable bonds on other european nations with a fixed interest rate, the Rothschilds made a colossal fortune by making these loans and by speculating on their rise and fall."

This quote illustrates the Rothschild family's innovation in creating the modern bond market, which had significant financial implications and is compared to the creation of venture capital as a new asset class.

The Philosophy of George Doriot

  • Doriot's philosophy encompassed self-improvement, teamwork, and societal contribution.
  • He imparted practical and pithy advice through his maxims.
  • His teachings went beyond manufacturing to life and business philosophies.
  • Doriot's influence extended through his writings, speeches, and his role as a professor.

"A real courageous man is a man who does something courageous when no one is watching him."

This maxim, attributed to Doriot, conveys the importance of integrity and courage in personal character, reflecting his broader philosophy on life and business.

Doriot's Career and Contributions

  • Doriot had a diverse career, including founding ARDC and INSEAD, teaching at Harvard Business School, and serving as a brigadier general during World War II.
  • His contributions to the military and business were innovative and forward-thinking.
  • Doriot recognized the importance of globalization, creativity, and technology in business well ahead of his time.

"During World War II, Dorio played a critical role in the allied victory and learned how to become a venture capitalist."

This quote links Doriot's wartime experience to his development as a venture capitalist, showing how his military leadership informed his business acumen.

The Importance of People in Business

  • Doriot believed that people are the key to success in business.
  • He valued the role of individuals in generating ideas and driving innovation.
  • The book "Creativity, Inc." by Ed Catmull aligns with Doriot's views on the importance of managing creative talent effectively.

"Ideas come from people. Therefore, people are more important than ideas."

This quote, resonating with Doriot's philosophy, emphasizes the significance of individuals over ideas in the context of business success and innovation.

The Start of ARDC and Challenges

  • ARDC began modestly with a $3 million fund but grew significantly over time.
  • Doriot faced challenges with the structure of ARDC, SEC regulations, and compensation issues.
  • His long-term investment approach and focus on nurturing companies were unconventional at the time.

"George often worked with a company for a decade or more before realizing any return. That is why he often referred to his companies as his children."

The quote reflects Doriot's patient investment strategy and personal commitment to the companies he supported, likening them to his own children.

Combining History and Technology

  • Mark Andreessen's approach to combining knowledge of history and business with technology is highlighted.
  • Understanding human nature and historical patterns is crucial for identifying new asset classes and opportunities.
  • The emergence of cryptocurrency and NFTs as new asset classes is discussed as a modern example of this principle.

"Study history. So you have a fundamental understanding of human nature."

This advice, reflective of Andreessen's strategy, underscores the importance of historical knowledge in grasping the principles underlying contemporary business and technology trends.

Relationship Philosophy and Mentorship

  • The speaker emphasizes the importance of relationships and loyalty over mere financial returns.
  • Mentorship and nurturing relationships are highlighted as key to success in business and personal development.
  • The concept of "building men and companies" is introduced, illustrating the speaker's belief in the importance of developing both individuals and their enterprises.
  • The speaker references surrogate paternal relationships formed with younger business associates.
  • The idea of investing in people, not just companies, is underlined as a strategy for long-term success.

"When you have a child, you don't ask what return you can expect. [...] I am building men and companies."

This quote encapsulates the speaker's philosophy that investing in people, similar to raising a child, is not about immediate returns but about long-term growth and development.

George's Investment Philosophy

  • George is described as someone who values the character and loyalty of people he works with, even over a higher rate of return.
  • The speaker draws parallels between George's approach to business and his personal values, emphasizing the importance of good and loyal individuals.
  • George's relationship with Ken Olson and Digital Equipment Corporation is used to illustrate his investment philosophy.
  • The speaker notes the significant financial success of Digital Equipment Corporation as an example of George's effective strategy.

"But if a man is good and loyal and does not achieve a so-called good rate of return, I will stay with him."

This quote reflects George's commitment to the people he invests in, prioritizing their qualities over immediate financial gains.

Early Influences on George

  • George's father's influence on him is discussed, highlighting the importance of striving for excellence.
  • The speaker notes the impact of George's father's strict expectations and the lesson George learned about never being content with second place.
  • The story of George's father, August Dorio, and his mentorship under Armand Peugeot is shared, illustrating the significance of mentorship in shaping careers.
  • The narrative of George's father's career and the impact of World War I on his business is used to explain George's conservatism in financial matters.

"Celebrating anything less than the best possible result smacked of contentment. And contentment, his father believed, is a state of mind that recognizes no need for improvement."

This quote highlights the rigorous standards set by George's father and the impact it had on George's own pursuit of excellence.

George's Career and Legacy

  • George's contribution to the startup nation and his role in democratizing finance is emphasized.
  • The speaker describes George as a pioneer in fostering an economy built on entrepreneurship and innovation.
  • George's teaching, writing, and leadership are credited with having a significant influence on the financial industry.

"George was the prophet of this new startup nation, the leader of a social and economic crusade that democratized the clubby world of finance more than any other person."

This quote positions George as a transformative figure in the world of finance, particularly in the startup ecosystem.

Work Ethic and Personal Philosophy

  • George's work ethic and dedication to his students at Harvard Business School are highlighted.
  • The speaker discusses George's philosophy of providing personalized attention and instilling a strong work ethic in his students.
  • George's pragmatic approach to teaching is contrasted with the theoretical focus of other professors.
  • The speaker notes George's interest in exploring new business subjects such as entrepreneurship and leadership.

"I do believe that the men leave my class, they have a definitive notion of what an honest day's work means."

This quote reflects George's emphasis on hard work and his commitment to imparting this value to his students.

Cautionary Tale of Work-Life Balance

  • The speaker shares a personal story about George's regret over prioritizing work over family life.
  • The narrative of George's wife's illness and death is used to illustrate the consequences of not balancing work and personal relationships.
  • The speaker warns against the common mistake of overworking at the expense of family and personal life.

"If you over optimize your work life at the expense of your family, you are going to regret it."

This quote serves as a cautionary reminder of the importance of work-life balance and the potential for regret if one's career is prioritized over personal relationships.

George's Disdain for Wall Street and Venture Capital Vision

  • George's dissatisfaction with Wall Street's lack of entrepreneurial spirit is discussed.
  • The speaker explains George's vision for a new asset class to support innovation and entrepreneurship.
  • George's experiences in the military, academia, and on corporate boards are mentioned as contributing to his venture capital philosophy.

"A commercial bank lends only on the strength of the past. [...] I want money to do things that have never been done before."

This quote captures George's forward-thinking approach to finance, focusing on future potential rather than past performance.

George's Transition to Academia and Venture Capital

  • George's move from investment banking to academia is described as a response to his dissatisfaction with the banking industry.
  • His role as a mentor and his detailed attention to his students' futures are highlighted.
  • The founding of ARD (American Research and Development Corporation) and its challenges during World War II are recounted.

"Over the next four decades, George would go on to mentor thousands of other students, giving them advice, finding them jobs, guiding them in their careers, and taking an extraordinary personal interest in each and every one of their futures."

This quote emphasizes George's long-term commitment to his students and his role as a mentor beyond the classroom.

Venture Capital Industry Beginnings

  • The early venture capital industry learned from the experience of Enterprise Associates.
  • Companies should have their own capital to be insulated from uncontrollable external events.
  • The formation of the venture capital industry was delayed by World War II.

"They realized it was a good idea. It might not be a good idea to have a company with only enough money to find and study projects."

This quote highlights the realization that companies should have sufficient capital to not only explore but also to start new projects without external fundraising.

George Compton's Military Experience and Venture Capital

  • George Compton's military service during World War II informed his venture capital career.
  • He learned to identify soldiers' needs and develop products to meet them.
  • Working with smart and intelligent people was a key lesson from this period.
  • Maintaining relationships with driven individuals proved beneficial for Compton.

"George learned how to become a venture capitalist during the war."

George Compton's military experience provided him with skills and insights that were applicable to venture capital, such as identifying needs and overseeing product development.

Importance of Direct Information

  • George Compton valued unfiltered information from the front lines.
  • He broke the chain of command to avoid distorted messages.
  • Similar approaches were taken by other successful business founders.

"One of the wonderful peculiarities of George was that he didn't want word coming back from channels."

This quote illustrates Compton's desire to receive direct, undistorted information, which he believed was crucial for effective decision-making.

American Research and Development Corporation (ARD)

  • ARD was founded to develop new businesses into significant companies.
  • It sought funding from non-family sources, expanding the potential venture capital pool.
  • ARD had to navigate financial regulations to make their venture viable.

"Ard was formed... to aid in the development of new or existing businesses into companies of stature and importance."

This quote defines the mission of ARD, highlighting its pioneering role in professional venture capital.

Investment Guidelines and Early Investments

  • ARD set clear investment guidelines focusing on projects beyond the experimental stage.
  • Early investments included a range of innovative technologies.
  • The firm's best opportunities were considered to be the riskiest investments.

"The firm set clear guidelines for making investment projects should have passed the test tube stage."

The quote indicates ARD's strategic approach to investing, favoring projects with a certain level of maturity and potential for profitability.

Venture Capital Misunderstandings

  • George Compton faced challenges in raising funds and dealing with regulatory hurdles.
  • ARD's work was counterintuitive and often misunderstood by outsiders.
  • Despite progress, ARD was seen as a philanthropic enterprise rather than a financial player.

"Never go into venture capital if you want a peaceful life."

Compton's quote conveys the turbulent and challenging nature of the early venture capital industry.

Managing Talent and Mindset

  • George Compton believed managing talent was crucial in startups.
  • He emphasized the importance of an able person over a great idea.
  • Managing mindset was a part of his leadership approach.

"An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability."

This quote underscores Compton's belief in the importance of capable individuals in realizing the potential of business ideas.

Challenges and Progress

  • ARD struggled with public perception and stock prices.
  • The firm's portfolio showed growth, but investors were impatient.
  • Compton advocated for patience, emphasizing the creation of value over time.

"The corporation does not invest in the ordinary sense, it creates it."

Compton's quote explains ARD's unique approach to investing, focusing on creating value through long-term development rather than short-term gains.

The Future Value in Misunderstandings

  • Misunderstandings by others can indicate potential future value.
  • ARD faced pressure to sell but Compton remained resolute.
  • The firm's internal lessons contrasted with external skepticism.

"Now we realize that our best things are long haired."

This quote reveals the internal realization within ARD that their riskiest investments had the greatest potential, despite external doubts.

Building a Venture Capital Community

  • A decade into its existence, ARD had a record of nurturing successful businesses.
  • The firm aimed to create a venture capital community and a blockbuster company.
  • Ken Olson and Digital Equipment Corporation (DEC) became ARD's first major success.

"We felt electronics was going to revolutionize industry."

Ken Olson's quote reflects the visionary foundation for DEC, which aligned with ARD's goal to invest in revolutionary enterprises.

Ken's Belief in the Power of Electronics

  • Ken Olsen believed that electronics would revolutionize the industry.
  • He was involved in helping the US Navy and studying at MIT.
  • Ken was given an opportunity to participate in a project in 1952, demonstrating his forward-thinking attitude.

In 1952, Olsen, a cocky 26 year old, was asked to participate.

This quote highlights Ken Olsen's confidence and proactive approach at a young age, which was a precursor to his significant contributions to the electronics industry.

The Importance of Cockiness in Innovation

  • Nolan Bushnell highlighted the importance of being cocky for creative individuals.
  • Cockiness is linked to self-confidence, which is necessary to push creative ideas onto others.
  • Steve Jobs, mentored by Bushnell, exemplified this trait by not caving under pressure despite others having equally good ideas.

Perhaps everyone has creative potential, but only the Arrogant are Self confident enough to press their creative ideas on others.

This quote reflects the belief that self-confidence, sometimes perceived as arrogance, is essential for innovators to persist with their ideas despite resistance or skepticism from others.

Ken Olsen's Disdain for Corporate Conformity

  • Olsen rejected the traditional corporate image and the "organization man."
  • He believed in the power of individual engineers and small teams to create world-changing products.
  • His vision included launching a computer company to challenge IBM's dominance with more affordable and user-friendly machines.

Olsen despised the organization man with his perfectly trimmed hair and his immaculate gray suit.

This quote illustrates Ken Olsen's contempt for the conventional corporate culture of the time, favoring a more individualistic and innovative approach to business and product development.

The Value of Work Ethic

  • George, a colleague of Ken, valued hard work and employed individuals with strong work ethics, like Scandinavians.
  • Work ethic was seen as a critical trait for success within the company.
  • This belief was embodied by the hiring of hard-working individuals who were expected to drive the company forward.

Scandinavians work very hard, replied George.

George's comment on Scandinavians' work ethic underscores the importance he placed on diligence and perseverance as key factors in the success of his business endeavors.

Revolutionizing Personal Computing

  • Olsen aimed to make computing more personal and accessible, challenging the prevailing view that computers were not to be treated lightly or used for fun.
  • He faced opposition for his ideas but remained undeterred, reflecting the importance of determination in innovation.

Computers are not a toy.

This quote represents the skepticism Olsen faced when proposing the idea of personal and interactive computing, challenging the traditional view of computers as serious and formal tools.

Financial Prudence in Business

  • A maxim from George's philosophy was to raise money when it's not needed, as it's harder to obtain when in dire need.
  • This aligns with Warren Buffett's advice on having financial firepower during times when credit is expensive or unavailable.

You should always raise money when you don't need it.

The quote emphasizes the strategic advantage of securing financial resources before they become necessary, allowing for better positioning during challenging economic times.

The Role of Teaching in Leadership

  • George viewed himself primarily as a teacher rather than a businessman.
  • The role of teaching is recurrent among successful individuals across various fields.
  • Teaching and repetition of core philosophies are crucial for instilling values and guiding teams.

Making money wasn't really a very high objective.

This quote reveals that for George, the educational aspect of his work and the pursuit of a greater good were more important than financial gain, reflecting a common mindset among influential leaders.

George's Investment Philosophy

  • George believed in the high rewards of risky ventures, steady growth, and the potential of technology.
  • His role included convincing small companies to accept outside help, understanding the entrepreneurial mindset.
  • Management assistance was vital in venture capital, which should be aimed at building creative capital.

The riskiest part of the spectrum has to date proved the most rewarding.

George's statement indicates his belief in the potential for high returns from investing in high-risk ventures, particularly those involving innovative technology startups.

The Importance of Patience and Belief in Entrepreneurship

  • George rejected offers to sell out, believing in the independent success of companies like DEC (Digital Equipment Corporation).
  • He practiced patience and had a deep understanding of the value of nurturing companies over time.
  • This approach is contrasted with decisions made by other entrepreneurs, such as the sale of Instagram and Snapchat's decision not to sell.

Ard wouldn't buy and sell companies at the first opportunity.

Ken's reflection on George's investment strategy shows a long-term vision and commitment to the growth and independence of the companies he invested in, rather than seeking immediate profits.

Venture Capital and Regulatory Challenges

  • George faced challenges from the SEC, which did not appreciate the importance of venture capital.
  • The struggle with regulators coincided with a growing recognition of George's achievements.
  • The regulatory environment led to a talent drain and the realization that a partnership structure was better suited for venture capital.

The SEC's lack of appreciation for the importance of venture capital was driving the general mad.

This quote captures George's frustration with the SEC's inability to recognize the value of venture capital, which was a significant obstacle in his efforts to support and grow innovative companies.

Legacy and Impact

  • George's retirement speech emphasized the importance of making contributions to others' happiness.
  • He used the metaphor of building cathedrals to inspire a collective purpose and vision.
  • George's impact on financing entrepreneurs in an organized way was groundbreaking.

Let us build cathedrals together.

The quote from George's retirement speech serves as a call to action for collective effort and collaboration, with the metaphor of cathedral-building symbolizing the creation of enduring and significant work.

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