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     A Business Forum Book Review:

Creative Capital

Georges Doriot and
the Birth of Venture Capital

Spencer E. Ante

Harvard Business Press
April 2008     ISBN 978-1-4221-0122-3     US$35.00

See also:
  The Money of Invention: How Venture Capital Creates New Wealth  by Paul A. Gompers and Josh Lerner

irth and death are life's greatest mysteries. This is true not just in biology, but in almost every other aspect of life — especially economics and sociology. For the past half-century, we have been fascinated with the newly-defined discipline of venture capital — the  creation of new economical ventures.

marginEarlier called risk capital, the discipline of venture capital is now understood to be the rational search and identification, seed financing, and nurturing of new or fresh enterprise. Risk capital had always been secured for the financing of sailing ships, grist mills, textile mills, railways, the telegraph/telephone, and automobiles.  However, in the immediate aftermath of World War II, the far-reaching importance of science and technology to both commercial and military needs was recognized. J.H. Whitney & Company and the Rockefeller Brothers Company were organized in 1946 by two affluent East coast families to address these opportunities. Coincidentally, the American Research & Development Corporation (ARD) formed the same year in Boston was the first professional venture firm that sought to raise money from nonfamily sources — primarily institutional investors such as insurance companies, educational organizations, and investment trusts.  Georges Frederic Doriot was selected to be the Chairman of the Board of Directors of ARD, and has often been called the "father of venture capital."

marginSpencer E. Ante, an editor with Business Week, offers a thorough and authoritative biography of Georges Doriot. including access to materials assembled for a never-published biography commissioned by his estate. He was born in Paris in 1899 the son of Auguste Doriot, an engineer with the Peugeot Motor Company and later an entrepreneur-founder of Doriot, Flandrin, Parent, an innovative automobile company. Emigrating to the United States in 1921, he subsequently embarked upon his professorial career at Harvard University's Graduate School of Business Administration in 1925. (He became a naturalized US citizen in 1940.) Following a flourishing early career, Doriot joined the United States Army in 1941; his distinguished military service concluded with direction of research and development in the Office of the Quartermaster General from which he was released in 1946 with the grade of Brigadier General. He was known affectionately for the rest of his life as the General (French pronunciation with the accent on the last syllable).

marginUpon returning to the Harvard Business School following World War II, Doriot taught an immensely popular and celebrated course simply titled Manufacturing until his retirement in 1966. This course was not primarily about manufacturing, but was an inspiring exploration of business philosophy. He and his beloved wife, Edna, were never blessed with children, but he maintained extraordinarily close life-long relationships with hundreds of his remarkable students (disciples) whom he genuinely embraced as "my children."  His lectures sparkled with never-to-be forgotten aphorisms:

Bullet   Always remember that someone somewhere is making a product that will make your product obsolete.
Bullet   A real courageous man is a man who does something courageous when no one is watching him.
Bullet   If any information is to be exchanged over whiskey, let us get it rather than give it.
Bullet   An auditor is like a tailor: He can make a fat man look thinner or taller or younger.
Bullet   You will get nowhere if you do not inspire people.
Bullet   Be friendly but not chummy with your lawyers.
Bullet   When travelling, always adopt the psychology of a suitcase.

marginDoriot's parallel academic goal was achieved in 1957 with the founding of the Institut européen d'administration des affaires in Fontainebleau, today's premier school of business in the European Union.

marginOf course, Georges Doriot is known most widely as the founder of the modern venture capital (VC) industry. ARD launched 120 companies during its 26-year history ranging from the high-tech (Ionics, Inc., Teradyne, Inc., and Tracerlab GmbH) to the prosaic (Zapata Off-Shore Company and Island Packers, Incorporated). But Doriot's outstanding success was the launch of the Digital Equipment Corporation in 1957. ARD's initial investment of $70,000 eventually yielded $38.5 million following DEC's 1966 IPO.

marginWhile this IPO was immensely "successful," it also uncovered some of the flaws with the early VC model. ARD had received 70 percent of DEC's startup equity; hence, many key employees did not have significant equity interests and the IPO's "success" generated disappointment and resentment. The subsequent offering of options to a wider group of employees sputtered when the public shares later dropped. Share appreciation failed to shower the beneficence that was later to generate so much VC excitement and wealth.

marginAs a publicly-traded corporation, ARD faced continuing squabbles with the Securities and Exchange Commission and the Internal Revenue Service, and found it impossible to adequately reward both its key employees as well as its own shareholders. The observed lessons led the later Silicon Valley VC firms to organize as limited partnerships.

marginGeorges Doriot was unquestionably a visionary financier, an inspirational teacher, and a leader of resolute integrity. Sadly, the end-game was disappointing. He was never able to turn his legendary Manufacturing course over to a worthy successor. Similarly, despite years of struggle, he was not able to install a worthy successor at the American Research and Development Corporation. Forlornly, ARD was merged with (sold to) Textron Inc, a conglomerate in Rhode Island, in 1972 and was later spun back out as an independent entity; today, it is a shadow of the driver of innovation that changed our world in the 1950s and 1960s.

marginThe hundreds of lights ignited in "my children" are luminous today throughout the world. His memorial service at the Park Street Church in Boston on September 22, 1987 drew a Who's Who of the world's leaders in industry and finance. Each attendee was given this poignant reading:

The story of my life
Is not a business story.
It is a love story
So deep and profound
That it cannot be separated.
No love story ever is.

marginAnother memorial service was held in Paris. Remarkably, almost 20 years later, an overflow gathering of "my children" attended a tribute on October 5, 2005 upon the sixtieth anniversary of the founding of The Edna and Georges Doriot Cultural Center at the French Library in Boston. While Doriot's ashes (had been) spread exactly where Edna's remains had been dispersed nine years earlier, reuniting Georges and Edna in the cold blue waters of the Atlantic Ocean, few leaders have left so many indestructible memorials.

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