The military and venture capital seem to have nothing in common. After all, one is highly regimented and codified and the other, freewheeling and instinctive. However, early venture capital seems to have taken many of its cues from the military. Three industry pioneers – Laurence Rockefeller, William Draper Jr, and Georges Doriot – drew heavily from their experience in the military in establishing venture capital projects.
Rockefeller, who rose to the rank of lieutenant commander in the US Naval Reserve in World War II, was fascinated by everything military and space-related (he was also into UFOs and parapsychology). After the war, he invested in Eastern Airlines and McDonnell Douglas, two companies that became leaders in their field. Later, the Rockefeller family fund would evolve into Venrock, one of the industry's most influential venture funds.
William Draper Jr was a four-star general in World War II, then became Undersecretary of Army during the administrations of presidents Truman and Eisenhower. He later founded Draper, Gaither & Anderson, one of the first West Coast venture capital funds and one of the early Small Business Investment Companies (SBICs).
?Gregory knew that Doriot's unusual personality traits included an abiding interest in the country's welfare and a pioneer's zeal in exercise physiology,? writes Marcia Lightbody in the Military History Review. Doriot took a Quartermaster Corps that was understaffed, undercapitalised and hampered by outmoded technology and transformed it through clever marshalling of resources and aggressive recruiting.
At the end of the war, Doriot returned to Harvard and began to give life to an idea that had been germinating for years ? a venture capital fund. Before the War, Doriot, Ralph Flanders, senator from Vermont, and Merrill Griswold, chairman of the Massachusetts Investors Trust, had discussed the idea of an institutionally backed venture capital fund. In his notes, Doriot described the mission of the fund, to be called the American Research & Development Corporation (ARD). It set out to ?assist in creating companies based on the ideas and techniques of competent men/ invest in new companies/ invest in existing small or medium-sized companies which appear to have growth potential?. ARD was to invest in ?technically-based? companies, but also in the publishing, entertainment, consumer goods, communications, educational supplies and equipment, and consulting and data processing services industries. Doriot managed to attract some of the most influential corporations as investors and brought on board some prominent financiers including Lessing Rosenwald, former chairman of Sears, Roebuck, Thomas Lamont, late chairman of JP Morgan, and Paul Clark, president of John Hancock Life Insurance Co. The investors would become key to his portfolio companies because many of them would later become customers and suppliers.
The formation and the structure of ARD in 1946 was a seminal event, not because it created a new venture capital fund but because it established a set of practices that until then had been very much extemporaneous. Doriot didn't try to create a set of absolute criteria. Instead, he emphasised that each deal was unique and would be evaluated on its own merits. Unlike contemporary funds, ARD had no management fee. The fund would receive a consulting fee from its portfolio companies and later would receive a share of the gains on exiting from investments.
Doriot managed the fund in the same sparse and innovative way he operated the Quartermaster Corps. He worked hard at due diligence, calling on a giant roster of experts, practitioners and scientists for advice and help. And he took on investments only after he was convinced that the management teams were credible and the products real. And he always worried that problems with one company had the potential of undermining the entire undertaking.
In Doriot's venture capital universe, the emphasis was on people. He strongly believed that finding the right people was more important than finding an attractive product. Entrepreneurial managers could always find a home for a product. Good products without the right teams to manage them wouldn't work. The general was always accessible. He felt that ARD, even when it didn't actually fund an entrepreneur or project, could provide advice and assistance.
An article about ARD in the September 26 1960 issue of Barron's put it this way: ?American Research headquarters in Boston constantly is besieged by would-be industrialists, some lugging inventions, others carrying supposedly money-making schemes in their heads. Many of the ideas have real merit, and even though they fail to meet ARD's investment standards, the applicants are given sound advice on how to carry them out.? After the aforementioned article came out, Doriot's fund received an average of 70 letters a day.
Doriot's most successful investment was in Digital Equipment Corporation. A $70,000 commitment to the computer maker was at its peak valued at an estimated $500m. Many have argued that DEC was ARD's one-trick pony. But the success of DEC was in great part due to Doriot's willingness to take a technological risk and the close manner in which he worked with DEC in building what was one of the technological giants of its time. Doriot not only helped nurture DEC, he also remained its largest shareholder until ARD was sold to Textron in 1972.
Doriot lived and worked at a time when venture capital was a new concept to Wall Street and to most Americans. Going public required a real company and often several years of revenue, if not profitability. It is in this context that Doriot built ARD, an early-stage venture capital fund that recognised the need to build companies and to create value before wealth could be generated. He did all this with scarce resources and nominal public support ? in much the same fashion that he reshaped the Quartermaster Corps during the War.
Udayan Gupta is the editor of Done Deals and is the author of The General: Georges Doriot on Leadership, Capital and Organisation, soon to be published by Bayeux/Gondolier.