Thursday, July 09, 2009

History of venture capital

Some time ago I listened to this lecture by Spencer Ante, on his book Creative Capital, and have been meaning to blog about it.

Q: When did the business model for VC take shape? In other words, when did people become convinced that money should be pooled specifically to invest in small companies developing products based on new technology? What were the first VC funds?

A: Ante claims the first VC fund was Georges Doriot's ARDC founded in 1946. Judging from the size of funds raised even 40 years later, it took a long time for investors controlling large pools of money (i.e., pension funds, endowments) to become convinced about the model.

Q: What was the first "homerun" investment? A: Digital Equipment Corporation (DEC) -- ARDC made 500x on a $70k investment!

Q: How did the VC industry take root in Silicon Valley, migrating from its original home in Boston? A: Long story; listen to the lecture and consult histories of Fairchild Semiconductor, Intel, Fred Terman at Stanford, etc.

Q: What role did defense funding play in the development of VC and the tech industry in general? A: A big one. See Doriot's bio and listen to the lecture. DEC was more or less an MIT Lincoln Lab spinout.

Of course, venture capital is far more than just a business model these days -- it's a source of unique American competitive advantage. It's an example of good pooling of risk (each startup is very risky, but perhaps portfolios of startups have predictable behavior and desirable risk-return ratios) that nevertheless took 50 years to transition from crazy innovation to accepted and mature financial technology.

1 comment:

Abhinav said...

Was reading an article about Georges Doriot here
and it mentions the DEC investment.

"In 1957, ARD gave $70,000 to the two young MIT engineers who cofounded Digital — Kenneth P. Olsen and Harlan Anderson — in exchange for 70 percent of the start-up’s equity. "

It seemed like he was a tough investor.

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