Problems Facing Venture Capital Today Are Not New

Venture capital has become even more bureaucratized and layered — with investment advisers, funds of funds and an assortment of “experts” who have interjected themselves between the innovation process and the capital that fuels it. The intermediaries, many say, have added time and costs to an already complex process.

So the question is, how far have we come? In 1971, well before pension funds began investing billions in venture capital, Georges Doriot, one of the co-founders of American Research & Development (ARD), wrote the following in his introduction to the fund’s annual report.

“Nineteen seventy one was ARD’s 25th year of operation. During the life of ARD, certain things have taken place:

• The investment community became interested in venture capital. As speculative excesses increased, understanding and interest tended to disappear. Disillusionment and disenchantment usually follow periods when the true meaning of a task is ignored and forgotten.

• Venture capital seems to have shifted from a constructive, difficult task to a new method of speculation.

• Capital gains have become a primary goal instead of being considered as a reward for a constructive task well done.

• Manufacturing capital gains seems to be of more importance than manufacturing products. As a matter of fact, in many cases, the latter seem to be of little importance!”

Doriot died in 1987, well before the Internet bubble of the 1990s. But he could well have been writing about the state of venture capital now.

American Research & Development’s numbers were impressive. The first share value of AR&D in 1971 stood at $69.67, almost 35 times the $2.01 in share value in 1946.

Even in those formative years of the venture industry, Doriot recognized its limitations. The stock market was the optimal exit for venture-backed companies, and from time to time it would relent and finance companies in their early stages of development. But for the most part, companies had to demonstrate maturity and a degree of sustainability before they could test the markets. Doriot felt many companies that could manage their own growth and development were ill equipped to manage the legalisms and regulations of being a public company.

Doriot decided to sell ARD. Not comfortable with the direction of the industry, he felt that ARD, in spite of its preeminence, wouldn’t fare well going forward. He chose to sell not to other venture capitalists, but to Textron, a conglomerate that was aggressively seeking to branch out into new technologies.

Doriot also decided to become more of a champion and mentor to the companies he helped finance. He began to establish partners who understood and could support the entrepreneurial process. He “raided” his then–law firm Gaston Snow, lured three of its young lawyers into forming a new law firm that would exclusively serve venture funds and entrepreneurial companies. In time the firm, Testa, Hurwitz and Thibeault, became one of the preeminent law firms in the space.

Doriot saw venture capital as a process of discovery and birth. He took great joy in finding new ideas and championing them, and in championing the companies that developed them. So when a combative Boston Globe reporter took Digital Equipment Corp. to task for its missteps in the 1980s, he fashioned this response:

“Newspapers have such great foresight, particularly on subjects they have no knowledge of and, of course, for which they carry no responsibility.

“You have a happy life but are not very constructive.

“In this difficult economic period, when people are troubled, lose faith, do not have many things or people to admire, Mr. Rosenberg, could you not write an article which gives credit to a hard job well done, which gives hope, which gives praise, which gives, positively, the results of the wonderful people who work at Digital Equipment Corporation? Could you not show them some appreciation? Show faith in their work, their product, their company?”

Until his death in 1987, Doriot remained a champion of entrepreneurs and enterprise but seemed to indicate to those close to him that venture capital was not fun anymore.

A veteran venture capitalist who recently closed on a new VC fund reflects on the experience of raising money in the current climate:

“Has it been a fun process? Honestly, no! It has had so many frustrating moments with people who don’t return phone calls or emails, people who don’t read the documents, people who can’t and don’t take it as seriously as you do, people who bring you halfway across country for a ‘full committee meeting’ and only a junior analyst shows up. The list goes on and on.

“It is a humbling experience that should make you more aware of your own treatment and response to entrepreneurs who approach you daily in their own pursuit of capital. The experience should absolutely influence the style and dignity with which you say yes or no and the speed of response or both.”