Baker Library, Harvard Business School, Historical Collections, Arch P1. HBS Archives Photograph Collection

By Martin Fridson

Eighty years ago, on June 6, 1946, venture capital( VC) as we know it today began with the founding of American Research and Development( ARD). Due in significant measure to its innovations, today’ s venture capital industry plays a disproportionately large role in the US economy. In terms of Gross Domestic Product, VC’ s own financing activity accounts for 0.2 % or less, but VC-backed companies contribute approximately 20 % in a typical year. According to data compiled by the National Venture Capital Association, companies funded by VC create roughly half of new drugs that gain approval from the Food and Drug Administration. Across all industries, about 50 % of companies that go public in a typical year obtained their startup capital from VC firms.

It was largely thanks to venture capital that New England, where ARD was based, escaped the fate of the Rust Belt states following the decline of its key industry, textiles. In the 1960s, VC brought new employment to the region by funding the minicomputer boom. By 1967, a Commerce Department study named Boston the top American city in generating technology-based companies. Subsequently,

Portrait of Georges F. Doriot, circa 1925. the world’ s largest cluster of biotech companies was centered on Route 128 outside Boston.

Venture Capital Before ARD

American Research and Development, organized as a closed-end fund, was the first publicly traded VC company. Until it revolutionized the business, investors who provided what was then known as“ developmental capital” to frontier-technology entrepreneurs depended on money raised from wealthy families, such as the Rockefellers, Vanderbilts and Warburgs.

Those families’ access to choice investment opportunities in private companies resulted partly from US financial regulations. Unlike other advanced economies, the United States had no merchant banking industry, a function of restrictions imposed by the Glass-Steagall Act of 1933 and other New Deal measures. Precluded from investing in private enterprises, investment banks such as Morgan Stanley and Goldman Sachs focused instead on raising capital for large corporations, as well as governments, in the public capital markets.

Only a few months before ARD’ s 1946 launch, J. H. Whitney commenced operations with the traditional strategy of raising money from wealthy families, albeit with a more professional business structure. Founder John Hay Whitney’ s chief lieutenant, Benno Schmidt, Sr., is credited with coining“ venture capital,” a contraction of the term previously used by that company,“ private adventure capital.”

With the nomenclature in place, it remained for ARD to transform the business by raising capital from institutional investors, e. g., insurers, investment trusts and university endowments. That innovation originated in an initiative of the New England Council, a business association that included both public and private organizations among its participants. Recognizing that New England’ s textile industry was in an irreversible decline, the Council viewed the region’ s unparalleled roster of research universities and laboratories as a resource for reinvigorating the region’ s economy.

In 1939, at the suggestion of Massachusetts Institute of Technology( MIT) President Karl Compton, the Council launched a New Products Committee aimed at commercializing scientific advances. That entity, along with a related one known as Enterprise Associates, was put on hold by the widening war in Europe and eventually by America’ s entry into that war. By then, however, it had become clear that a truly effective venture capital vehicle would need its own funding, committed in advance and not subject to withdrawal in reaction to outside events. Obtaining such a capital base would require a more formal organization than the New Products Committee, one that could inspire investor confidence through

12 FINANCIAL HISTORY | Fall 2026 | www. MoAF. org