The death on Sunday of Kenneth Olsen, the founder of Digital Equipment Corporation, at the age of 84 was not unexpected. He had been in failing health for over a decade. But his legacy of science and entrepreneurship will be hard to replicate. Indeed, his passing and the death last May of Max Palevsky, the founder of Scientific Data Systems closes the chapter on two of the first entrepreneurs who dared challenge the monopoly of IBM in the 1950s and 60s and succeeded.
Olsen should be best remembered for being venture capital’s first entrepreneurial hero, building Digital Equipment, a maker of scientific computers, into one of the industry’s most profitable companies of the 1980s with sales of $14 billion. Indeed, he forged a unique relationship between technology and venture capital, a model that has been emulated in most of venture capital’s high-tech successes, even now in the Web 2.0 space.
I met Ken Olsen in 2002, a decade after he had left Digital and just about five years or so after the company had been acquired by Compaq Computer for $9.6 billion. But there was little of Olsen in the company that Compaq bought, Olsen would have been the first to tell you that. By 2002, Olsen had also left behind a start-up, Advanced Modular Solutions, a served designed to enhance the productivity of the VAX systems he had helped pioneer at Digital. But his heart was never in it and it wasn’t a solution that the new managers of Digital were supportive of.
Ironically, Digital might never have happened, were it not for a chance encounter between Olsen and venture capitalist Georges Doriot of American Research & Development (ARD) and the stealth mode in which Doriot invested $70,000 in seed capital in Olsen’s start-up.
In 1957, Olsen and Harlan Anderson, both of whom were conducting research at MIT approached ARD with the idea of designing and selling a scientific computer. While Doriot was completely taken by the idea and committed to invest, he worried that the idea of investing in a start-up with development-stage technology and no real product would convey the wrong ideas to his shareholders and investors. So the ARD annual report for 1957, while acknowledging the investment in Digital Equipment Corporation obfuscates the goals of DEC. It says that “DEC manufactures and sells transistorized digital ‘building block’ units, improved versions of research, development, and testing devices.” What DEC was building was a machine that would completely change the face of computing. And because there was very little to go on—no industry data, no competitive history, no market data— Doriot’s investment truly was a shot in the dark.
But Doriot wasn’t speculating. DEC’s technology had the right pedigree. It came out of MIT, which at that time was the premier engineering institution in the U.S., if not the world. In the first years of its existence, nearly three out of four of ARD’s technology investments had their origins at MIT. He also was counting on Olsen’s vision, a vision that he grew to respect even more with time.
Olsen said he became convinced of the need for real-time computing after the war. He recalled pilots being frustrated that radar systems could track and plot the directions of planes but couldn’t adequately calculate trajectories and intercepts. He also remembered how physically cumbersome such machines were. While canoeing in the Arctic, he encountered a bank of giant computers that NORAD then used to track planes and missiles. “They were very one-dimensional. They didn’t seem to have any other purpose,” he explained.
Olsen was convinced that real-time computing was necessary. And although he couldn’t cite chapter and verse on the potential market, he was confident that the needs would emerge as the machines became available. He was emphatic enough in his vision to have convinced Doriot.
DEC’s PDP (Personal Data Processor) was by all computing standards a radical product. It changed the face of computing. But Olsen didn’t want to merely dangle the promise in front of his investors. He went out of his way to create a design that non-technical investors would be comfortable with.
For his part, Doriot played the hands-off investor. He helped Olsen, Anderson and Olsen’s brother find an abandoned mill space in Maynard and worked hard at keeping them focused on the technology tasks. He also made sure that the milestones DEC achieved were adequately communicated to investors and potential customers.
What role could Doriot and ARD have played in the growth and development of DEC?
“The role of mentor and champion,” said Olsen. By today’s standards, the amount of money—$70,000—was small. But Olsen and Doriot put together a board that was a model of its time. It was a board that was vested in technology and technology change and understood the unpredictability of bringing about that change. And unlike many of the directors that populated the Internet bubbles nearly a half-century later, these directors took their work seriously. MIT Professor Ed Morse recalls that one director resigned at the time of DEC’s initial public offering because he felt that the financial results in the memorandum would mislead investors into believing that such results could be routinely replicated. The director felt that the company should not be used as investment indicators.
The concern was legitimate. Investing in early-stage companies especially in technology—companies that had little track record and no fully defined product—was no sure thing. And Doriot and his board were concerned that disappointed investors would not only hurt DEC, but the entire universe of early-stage technology companies.
By the late 1980s, DEC and its technology was overtaken by the new PC Wave and Olsen was criticized for not having recognized the signs of change. He also felt the loss of his friend and mentor Doriot who died of cancer in 1987.
Still, Olsen’s legacy will be the company he built, the style of management he brought to technology and creating a cadre of managers who then have gone on to create their own entrepreneurial stories.