significant constraints on the investment strategy and the company ’ s ability to compensate employees .
Even in the late 1950s , it was unclear whether ARD would succeed . The portfolio funded several successful ventures , but the successes did not adequately compensate for the failures . This changed on August 19 , 1966 , when Digital Equipment Corporation ( DEC ) became ARD ’ s first home run . ARD had invested $ 70,000 in 1957 , and after DEC ’ s IPO , its position was valued at $ 38.5 million . This equated to an annualized return of approximately 100 % per year over a 10-year period . The return was so large that it completely altered ARD ’ s overall performance . Between 1946 and 1971 , ARD produced an annualized return of 15.8 %. Without the DEC investment , it would have only returned 7.4 % per year . This single investment validated the venture capital model , but it also reinforced the fact that success depended almost entirely on the ability of venture capitalists to find home runs .
Venture Capital Moves West
“ West Coast investors aren ’ t bolder because they ’ re irresponsible cowboys , or because the good weather makes them more optimistic . They ’ re bolder because they know what they are doing .”
— Paul Graham , founder of Y Combinator
ARD proved the viability of venture capital in the 20th century , but the company did not survive . It merged with Textron Corporation in 1972 , and its influence waned . Doriot ’ s spirit lived on , however , as many of his former students and employees seeded a new generation of venture capital firms . Examples included Greylock Partners , Flagship Ventures and Fidelity Ventures . But the next generation set their sights on the West Coast , where a forward-thinking professor named Fred Terman had created a formidable hightech ecosystem in the vicinity of Stanford University .
The second generation of venture capitalists had a deep appreciation for the importance of hitting home runs , which made the high-tech industry the most attractive source of opportunities . Tech companies could quickly dominate large
The Social Benefits of Venture Capital
“ We are undertaking pioneering projects that with proper backing will encourage sound scientific and economic progress in a new field — fields that hold the promise of tremendous future development .”
— Laurance Rockefeller , founder of Venrock Associates
ARD proved that venture investing was viable for institutional investors , but it was not the first to resurrect the model itself . Ironically , the Rockefeller family — whose wealth derived from the demise of the whaling industry — was among the first to resurrect venture investing . But wealth creation was only a secondary goal . Their primary goal was to promote social and economic progress by supporting cuttingedge research in the United States .
The Rockefellers achieved their primary goal but fell short of the secondary one . Between 1938 and 1969 , the Rockefellers made 59 investments , which achieved an investment multiple of 3.2 . Over the same period , the stock market produced a multiple of 8.6 .
The Rockefellers ’ performance revealed an interesting paradox of venture investing . Considerable evidence suggests that individual investors in venture capital funds are unlikely to achieve a return that is commensurate with the risk , yet the aggregate investments of the venture capital industry can provide extraordinary benefits to society . For example , a recent study by Stanford University revealed that 43 % of US public companies founded since 1979 were funded by venture capital .
The paradox of venture investing is not a unique phenomenon . Investors experienced a similar dynamic when investing in canals , railroads and industrial conglomerates in the 1800s and early 1900s . Despite the high probability of disappointing returns at the individual level , the nation as a whole reaped significant benefits .
markets and then defend their position with strong patent protection . By 1970 , Silicon Valley was America ’ s high-tech capital . In 1972 , two of America ’ s most prestigious venture firms , Sequoia Capital and Kleiner Perkins , opened offices on Sand Hill Road . Many firms followed , and Sand Hill Road became the destination of choice for venture capitalists .
The Department of Labor Makes it Rain
“ The most common exit strategy was that we lost all our money .”
— Arthur Rock , founder of Davis and Rock
By structuring their funds as limited partnerships , the second generation of venture firms freed themselves from SEC oversight , but they faced new headwinds in the 1970s . The biggest one was an unanticipated side effect of the Employee Retirement Income Security Act ( ERISA ) of 1974 . The Act required trustees of ERISA plans to abide by the Prudent Man Rule when selecting investments . Fearful of violating the rule , most trustees restricted investments to traditional stocks and bonds . Even trustees of non- ERISA plans , such as endowments , exercised an abundance of caution and employed similar restrictions . As a result , venture funding all but evaporated in the mid-1970s .
The funding drought devastated the fledgling profession . The National Venture Capital Association ( NVCA ) responded by lobbying relentlessly to convince the Department of Labor ( DOL ) to allow a more flexible interpretation of the Prudent Man Rule . On June 21 , 1979 , the DOL
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