Who Is the Father of Venture Capital?
Throughout the course of human history, there have been some pivotal innovators who bear responsibility for major changes in the way life is lived. Personal choices, irrational choices, accidents, and minor interactions have had ripple effects on the lives of all living people. But what has always fascinated me are the lessons we can learn from history. In each historical event, there are major themes and minor nuggets of knowledge that all people should do their best to heed.
One piece of human history that is relatively young but still full of wisdom is the age of modern venture capital. There is one man who is largely responsible for the venture capital industry as we know it today – historians refer to him as the Father of Venture Capital. That man is Georges Doriot, a French military engineer who’s hard work, tenacity, and luck allowed him to set a precedent for the way startups are funded around the world.
Who Is Georges Doriot?
Georges Frederic Doriot is a Frenchman, born in 1899 in Paris, France to Berthe and Auguste Doriot. From the outset, Doriot had a family life that set a standard for innovation: his father was a motoring pioneer who built and raced cars for Peugeot before staring his own car company, D.F.P. The older Doriot was known for being a stern and demanding father, and set expectations high for the entire household.
Due to his experience working in the D.F.P. factory in his youth, Georges Doriot enlisted in the French military during World War I as an artillery engineer. Following the war, Doriot was sent to the United States by his parents for him to attend MIT. However, Doriot was convinced by then Harvard President Lawrence Lowell to attend Harvard Business School, seeing as how Doriot’s desire was to run a factory someday, not design automobile engines. After his time at HBS as a student, Doriot worked for the investment bank Kuhn, Loeb, & Company, assessing investments in new technologies.
After only a few years in the professional world, Doriot was offered a position with HBS as an assistant dean in 1925. Doriot eventually became a professor of Industrial Management at HBS. During his time at HBS as a professor, Doriot also served as a director on several boards, including Kansas City Southern Railroad, Standard Power & Light Corporation, and McKeesport Tin Plate, and as consultant to investment banking firms.
In the 1930’s, while Doriot was still teaching at Harvard, he also taught classes at the US Army Industrial College, training officers on how to prepare supplies and equipment. One of his students from those classes was so impressed with Doriot that he asked his old professor to help serve in the impending war effort. In 1941, at the outset of the Second World War, Doriot enlisted with the United States Military As Director of the Military Planning Division for the Quartermaster General, he worked on military research, development, and planning, eventually being promoted to brigadier general.
"Doriot learned how to become a venture capitalist during the war," Doriot's biographer Spencer E. Ante notes, "for it was through World War II that he underwent the most significant metamorphosis of his life, transforming himself from a professor of business into a world-class builder of innovative new enterprises." Doriot's understanding of the risks and rewards of investing in new technologies stemmed in part from his wartime experiences and would serve him well in the decades to come.
How Did He Get His Title
In 1946, after the war was ended, Doriot came back and founded the American Research and Development Corporation (“ARDC”), one of the first two venture capital firms in the country (and possibly ever). The purpose of ARDC was to encourage private sector investment into companies that were started by US soldiers coming home from the war. ARDC was partially funded by the United States Government.
ARDC benefited from the rapid advancement in technology that was spurred on by wartime needs and investment by the United States government. This, coupled with the booming post-war economy, led to an environment ripe for investment in new technologies and industries. Prior to ARDC, “startup” companies were mostly funded by wealthy angel investors and family funds. However, ARDC set the precedent that institutional capital could also invest in small, high growth businesses.
ARDC initially started out poorly, experiencing losses early on in the fund’s history. However, due to the long-term investment horizon of Doriot and a solid group of investments, the Company was able to succeed and achieve a steady stream of success starting in 1955.
Doriot benefited from having a wonderful team that started ARDC with him, a group that includes academics from Harvard and MIT, bankers, and traditional investors. ARDC also relied on some technical consultants who were more well-versed in areas such as aeronautics and chemical engineering. Doriot’s connection to HBS and his continuing teaching career there also opened ARDC up to a strong network of entrepreneurs and business-minds.
ARDC’s most notable achievement as investors was Digital Equipment Corporation (“DEC”). In 1957, ARD offered the two founders of DEC $70,000 in equity financing for a 70% share and an additional loan of $30,000. This investment was made after the founders wrote a four page business plan and a nine page proposal. Their proposal was to build computer circuit boards, a rather radical idea, since computers were still very much in their infancy. The rest of the investment community had shunned computer-related technology, but Doriot and ARDC saw the massive potential. The Company eventually became the second largest computer company and by 1966, it went public with a market capitalization of $38 million. This exit represented a 500x cash-on-cash return.
By the end of his career, Doriot had invested in over 150 startups and ARDC was listed on the New York Stock Exchange. The Company continued to see various investment successes and was well known throughout the investing world due to its prowess as a creative investor. The Company also had several former employees who founded venture capital firms such as Greylock Capital, Flagship Ventures, and The Palmer Organization – stalwarts of venture capital.
By the 1970’s Doriot decided that his time as a venture capitalist was drawing to a close. He retired in 1972 when ARDC merged with Textron. Pressure from an increased volume of venture capital firms as well as the introduction of the Small Business Investment Act proved to be too much for ARDC. At the end of the day however, there was no denying how much influence ARDC had on the venture capital community and the investment community as a whole. Georges Doriot designed a new way of investing that would shape the world for many years to come.
What We Can Learn
There are so many pieces of knowledge or sage advice that I can attribute to my own father, such as the meaning of grit and the best way to craft a good dad joke. Just like with my own dad, I think there are some key takeaways we can all learn from the Father of Venture Capital. Below is a list of some of the more prominent lessons we can all gather from Georges Doriot.
1. Patience is one of the most important attributes of a good venture capitalist. There are a handful of success stories that make investing sound like an overnight success, but most of the time it requires an extreme level of patience. Venture capital investment horizons can be long, but that’s not necessarily a bad thing.
2. There are a lot of ways to learn about scale, risk-taking and team building. Doriot cut his teeth in the US Army and learned about emerging tech through military means.
3. A VC should build their network out as much as they can and utilize that network. Doriot had an incredible network – he was surrounded by bright minds in the military, during his time at HBS, and with his technical consultants he hired at ARDC. Doriot’s network helped him identify deals, understand technology, and make better investment decisions.
4. Government-funded investment programs are a great way to get a community and a startup ecosystem jumpstarted. Doriot’s impact on the Boston venture capital community can still be felt today. Boston is one of the nations biggest VC hubs outside of Silicon Valley.