Wednesday, June 25, 2008 - The Progress & Freedom Foundation Blog

New Biography of Georges Doriot, Founding Father of Venture Capital

MIT's Technology Review has a great review of a new biography of Georges Doriot (Wikipedia) by Businessweek Editor Spencer E. Ante entitled, Creative Capital: Georges Doriot and the Birth of Venture Capital. Born in France, Doriot fought in World War I, then studied at Harvard Business School, served as director of the U.S. military's Military Planning Division during World War II as a brigadier general, and in 1946 launched American Research and Development Corporation (ARD) as the first publicly owned venture capital firm.

Doriot's legacy looms large today, even if his name is new to most:

Contemporaneously with ARD's watershed investment in [Digital Equipment Corporation], others began walking the trails Doriot had blazed: Arthur Rock (a student of Doriot's in the Harvard class of 1951) backed the departure of the "Traitorous Eight" from Shockley Semiconductor to form ­Fairchild Semiconductor in 1957, then funded ­Robert Noyce and ­Gordon Moore when they left ­Fairchild to found Intel; ­Laurance ­Rockefeller formed ­Venrock, which has since backed more than 400 companies, including Intel and Apple; Don ­Valentine formed Sequoia Capital, which would invest in Atari, Apple, Oracle, Cisco, Google, and YouTube.

Doriot himself would likely have felt at home among today's embattled and outnumbered regulation-skeptics in the technology policy community:
he opposed both the dirigiste political economy of his native France and the tax hikes and anticompetitive laws enacted in the United States under the New Deal. Such regulations, he maintained, arrogated to bureaucrats the function of the markets; their worst feature was that they let government lend money to failing businesses. Ante notes that a former colleague of Doriot's, James F. Morgan, recalled him as "the most schizophrenic Frenchman I've ever met"--devoted to his original land's wine, cuisine, and language even as "the French capacity to make very simple things complicated drove him nuts."

Even more intriguing is what Doriot's experience has to say about the vital role that corporations and securities laws plays in facilitating--or hindering--innovation by constraining the structures of the investment vehicles that fund the commercialization of new technologies:

Doriot endured bureaucratic regulators who did not understand or care how a venture capital firm differed from other investment companies. ARD suffered because, since it was incorporated as a publicly traded investment company, its employees could not generally receive stock options in its portfolio companies, despite Doriot's ceaseless pleas to the U.S. Securities and Exchange Commission.

The reality that Doriot's company faced from 1959 onward was that a new organizational form--the limited partnership, born in Texas's oil-wildcatting industry--was being adopted by newer VC firms. Ante quotes a former ARD executive who recalled that after he supervised the IPO of one portfolio company, the net worth of that company's CEO "went from 0 to $10 million and I got a $2,000 raise." A VC limited partnership, by contrast, gave its general partners not just management fees but also portions of its capital gains; additionally, it permitted profits to be passed on to its investors without incurring corporate taxes, and it mandated that limited partners stand clear of management. Small wonder that when Perkins helped found Kleiner Perkins Caufield and Byers in 1972, it was as a limited partnership. When Doriot finally accepted the SEC's intransigence, he deemed ARD "not competitive anymore" and sought the merger with Textron.

Similar disagreements continue between government and industry. After the dot-com and telecom crashes, Washington passed the Sarbanes-Oxley Act and new accounting rules for expensing stock options, despite the predictions of many tech­nology executives and VCs that regulation would undermine innovation. John Doerr at Kleiner ­Perkins, for one, believes that that happened: ­"Sarbanes-Oxley did have some chilling effects on technology startups in terms of the cost of being able to go public."

R.I.P., Monsieur Dorian. I look forward to reading Ante's biography.

Note that an audio version of the Technology Review article is available in audio form (Flash, MP3) as part of TR's podcast of all their stories. Once you get used to the Audiodizer computer voices that read the story--whose unintentionally hilarious mispronunciations and mis-emphases I have grown to love--the podcast becomes a valuable source of high-quality tech news and commentary.

posted by Berin Szoka @ 5:44 PM | Capitalism , Global Innovation , Innovation , Taxes