The Hindu Business Line : Birth of venture capital

Georges Doriot’s two main pursuits were military and teaching. Yet, what consumed his thoughts in the US of the mid-1940s was the creation of a venture capital industry and entrepreneurial movement that would ensure the post-war prosperity of the economy.

The Harvard professor was, however, to “battle for the next twenty-five years against an array of domestic forces that included clueless government regulators, short-sighted lawmakers, and ultraconservative investment managers,” writes Spencer E. Ante in Creative Capital ( www.tatamcgrawhill.com ).

In one of the chapters he tells the tale of ARD ( American Research and Development) Corporation, one of the few venture capital firms created after the war. Incorporated on June 6, 1946, under Massachusetts law, ARD was aimed at aiding ‘in the development of new or existing businesses into companies of stature and importance,’ as Doriot described in the company’s first annual report.

“ARD was the first professional venture firm that sought to raise money from non-family sources — primarily institutional investors such as insurance companies, educational organisations, and investment trusts,” narrates Ante. This was a critical development, he says, because it greatly expanded the potential amount of money that could be devoted to venture capital.

“As the first public venture firm, ARD also distinguished itself by seeking to democratise entrepreneurship by focusing on technical ventures and by providing the intellectual leadership for this small, nascent community.”

In forming ARD, its founders were guided by an intuitive understanding of the dynamics of entrepreneurship, the author explains.

“They realised that organisations with ‘enormous fiduciary resources’ and the seasoned operators running them were not daredevils skilled in the art of invention, and that, conversely, inventors were struggling creative types with no money ‘trying desperately to become poor businessmen’ in Doriot’s witty description.”

Though ARD sought to bring together these two interdependent yet largely separate communities, a decade would pass after its founding for the principles of venture investing to get codified…

The idea of venture capital was so new that ARD’s founders were forced to reengineer aspects of various financial regulatory structures in order to make their idea viable, Ante recounts. The ‘blue sky’ laws of some states, for example, “prevented investment trusts from investing in common stocks that were less than three to five years old, or had not paid dividends for several years.”

In 1947, ARD’s first full year of operation, “more than 400 nutty proposals streamed into the office. But ARD continued to remain as picky as the debutante of a Boston Brahmin. In any given year, ARD would never finance more than 4 per cent of the projects it reviewed, and more often than not it would only finance 1-2 per cent of its proposals.”

A story of particular interest to those in finance.

D. MURALI

http://BookPeek.blogspot.com

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