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Man running a Digital Equipment Corporation( DEC) workstation. DEC was one of ARD’ s most successful investments.
The Later Years and American Research and Development’ s Legacy
ARD turned out to be not only a champion of innovation, but also a victim of it. Organizing as a publicly owned closedend fund constituted a sharp departure from past practice, but it had inherent limitations. For one thing, the closed-end structure put pressure on ARD to deliver current income to its shareholders. Consequently, its financing of new ventures often consisted of convertible debt or convertible preferred stock, rather than common equity. The resulting interest charges, along with management fees charged by ARD, conflicted with early-stage companies’ need to pour cash into their businesses in pursuit of profits down the line. Furthermore, while the founders of many ARD-backed startups became immensely wealthy, a Securities and Exchange Commission( SEC) prohibition on stock options at closed-end funds meant that ARD could provide only modest bonuses to employees whose guidance was instrumental in those ventures’ success.
Seeking ampler rewards for their contributions, several ARD senior officers left to start new VC firms structured as limited partnerships. Free from SEC restrictions on equity participation, LPs could compensate their investment professionals more generously than ARD was able to do. Furthermore, this form of organization enabled venture capital firms to pass profits through to their limited partners, avoiding double taxation. With these advantages, limited partnerships became the dominant VC business model.
From 1946 to 1972, ARD generated a 14.7 % annualized return. Doriot’ s reign has been criticized for the fact that DEC accounted for just about half of that figure, which would have been 7.4 % without it. The General would not have apologized for that fact.“ If I were a speculator,” he said,“ the question of return would apply. But I don’ t consider a speculator— in my definition of the word— constructive. I am building men and companies.”
Regrettably, creating a succession plan was not among the many skills in which Doriot excelled. When he reached Harvard’ s mandatory retirement age, his popular Manufacturing course ended after he found flaws in every faculty candidate proposed to succeed him. At ARD, the board finally gave up trying to develop a succession plan and in 1972 accepted a merger offer from Textron. Ironically, that conglomerate had its roots in the New England textile industry, the decline of which set the stage for ARD’ s founding.
Doriot remained ARD’ s chairman until retiring in 1974. He came to regret the merger, saying,“ Large corporations kill innovation.” ARD operated as a Textron division, but it did not make many new investments. After the conglomerate sold the business in 1985, five employees of the pioneering VC firm preserved its legacy by launching new funds named ARD II and ARD III.
It is no wonder that American Research and Development’ s reputation has survived, even if its operations have not. ARD paved the way for venture capital’ s profound contributions, not only to America’ s economic growth, but to quality of life in such areas as improved healthcare, more convenient financial services and vastly increased access to information.
Doriot bequeathed to venture capital a spirit of breaking new ground and changing the world. As he said about the organization he brilliantly led,“ We are a movement, not just a company. A commercial bank lends only on the strength of past successes and proven assets. I want money to do things that have never been done before.”
Martin Fridson is chief investment officer of Lehmann Livian Fridson Advisors LLC. He is a longtime strategist and researcher whose innovations include the distress ratio, econometric modeling of the high yield risk premium and the equalized ratings mix approach to valuation. He has been a trustee of the Museum of American Finance since 2022.
Sources
Ante, Spencer E. Creative Capital: Georges Doriot and the Birth of Venture Capital. Harvard Business Press. 2008.
Earls, Alan R. Digital Equipment Corporation. Arcadia Publishing. 2004.
Gupta, Udayan. The First Venture Capitalist: Georges Doriot on Leadership, Capital, & Business Organization. Bayeux Arts. 2004.
Hsu, David H. and Martin Kenney.“ Organizing Venture Capital: The Rise and Demise of American Research & Development Corporation, 1946 – 1973.” Industrial and Corporate Change. June 21, 2005.
Morris, Edward.“ Georges F. Doriot: 1899 – 1987: Dream Builder.” Wall Streeters: The Creators and Corruptors of American Finance. Columbia University Press. 2015.
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