'Venture Capital for the Future - Implications of Founding Visions in the Venture Capital Setting'

Ph.D. Dissertation by Miriam Garvi, Jönköping International Business School

Chapter Seven: Venture Capital as Originally Intended (pp. 153-182)

Second Scene: The Lecture
The scene opens revealing the empty stage of a lecture hall. Dim lights are cast as a slim figure emerges from the shadows. There is complete silence. Then a voice rings out…
THE GENERAL (addressing the students): Gentlemen… (Clearing his throat, then continuing in an authoritative voice). In this class, I hope I will be able to teach you and help develop an attitude that will be useful in Manufacturing. I want you to have an ability to pick and lead people in such a way that they will do things they did not think they could do. This is the quality of a great business leader. To help you develop this attitude I would like to emphasize several important factors. First, you must train yourselves to be imaginative. You must look beyond to see objects which you can improve. To do this, you have to realize the needs for which the object is made – learn to think about how it was made, why it was made, who is going to use it, and how it is going to be used. Next, you must be able to get correct information. Previously, technology was simple, progress slow and it was possible to take ten years to succeed by making inevitable mistakes. The truth is that today there is no more time for learning by doing.
(Pausing slightly, then resuming). I have a story of a streetcar, an old-fashioned streetcar. And the story is this: If you stand at rest and try to jump on a moving streetcar, you break your neck. If you gather speed then jump on the streetcar, you stay on it, and ride with it. (Eying the students in the lecture hall.) So that’s the attitude I want you to learn. If you have been aware of the world around you, then you will be able to meet new problems as they come along. Finally, you must be able to prepare yourselves for crisis. On the threshold of crisis it takes courage, stamina and fortitude in order to be successful. You young men must decide now whether or not you have these qualities essential to the make-up of a good manufacturer.
Do not think that operating a company is operating a factory. You must broaden your concept far beyond this… Companies must carefully craft a technological strategy – uncertainty requires that you develop and strategize around hunches, not predictions, accompanied with a clear sense of direction. Understand the customer’s needs in spades, rather than depend on being able to predict the future of technology. We need personal appetite for change and progressive innovation. Technology can cause the building of real businesses that could bring about economic transformation. Let us set new goals, new ideas, and new visions! Let’s not be prisoners of bad habits and non-constructive thoughts! Let us escape from whatever prevents us from being daring, kind, thoughtful, and imaginative! Let us be honest with our families and with our nation!
People and ideas are our assets; their measurement, our problem. Analytical aptitude in itself leads to nothing, except making a good analyst. What’s more critical is not business administration, but rather business direction. To be effective, we must not drift. We must have a sense of direction, know enough, be observant enough to modify it and have the will power to drive towards our determined goal. We must acquire a pattern, to be improved as we go along, of course, but it is imperative that we have a pattern, or perhaps we may say “a set of habits” or a minimum code which is so much a part of ourselves that operating under and within it more or less automatically gives us strength and frees our mind for forward thinking and action. Power to do well comes with freedom of action. Clear and good habits, constantly improved, give a man greater competitive ability in the use and application of time and in the constructive utilization, direction and application of his mind, intelligence and will power. We are not outlining a course; we are attempting an experimental method of living in today’s world.
Setting high goals stimulates ability but means you need patience as well to realize their fulfilment. You have to make many decisions, you are intelligent and experienced. You have great reasoning power. Before you decide on anything, consult your heart, and please realize it should have priority. Sometimes, to be right you must stand alone. Sometimes, it takes great sacrifice to be right. It’s the simple things that count in life. The complicated ones I’m not worried about, you can figure them out. I know you will have to seek counsel from this time on. Your problem is to learn how to ask for it.
Gentlemen, I suggest that you start a Manufacturing notebook. It should become a habit to carry through life. It should become the mirror of your thinking. I repeat. It should become the mirror of your thinking.
The lecture hall falls into silence.
The origins of a venture capital idea
Since its early years following WWII, venture capital has gained legitimacy as an asset class of its own (see Burgel 2000) and a globalised industry branching across national borders. The venture capital phenomenon is commonly seen as the diffusion and adoption of shared practices (e.g. Avnimelech, Kenney & Teubal 2005; Bruton, Fried & Manigart 2005; Isaksson, Cornelius, Landström & Junghagen 2004) encouraged by strong normative influences in the environment, such as a powerful trade association (see Reiner 1991).  This is mirrored by the search for recipes enabling a world-wide reproduction of the ‘venture capital experience’ (e.g. Avnimelech et al. 2003). Commenting on the role of the American venture capital market as a benchmark for similar markets around the world, including Sweden, Anders Isaksson contends that “Around the world, everyone glances at what is happening in the U.S., and governments are trying to find incentives and remedies in order to copy the ‘genetic code’ of the U.S.”  (1999:5). Fuelled by rhetoric from ‘fashion-setters’ such as business mass-media publications and business school, sustained by mythical stories (cf. Bygrave & Timmons 1992; Zider 1998), the broad diffusion of venture capital as a solution for business development gives evidence of a fashion, i.e. a wide-spread belief that such a technique is at the forefront of progress (see Abrahamson 1996). It mirrors what I experienced as I plunged into the venture capital debate before the collapse of the ‘IT bubble’, namely that venture capital was a labelled solution which merit seemed almost taken-for-granted, recalling the observation by Barbara Czarniawska and Berward Joerges that “Words are turned into labels by frequent repetition in an unquestioning mode in similar contexts, so that a possible “decentralization, why?” will give way to “decentralization, of course!”…” (1996:32). In this chapter I will go beyond statements of ‘venture capital, of course!’ in order to examine the visionary origins of the venture capital phenomenon.
Venture capital as an objectified idea - the Swedish example
The proliferation of venture capital in Sweden can be seen as one illustration of how an objectified idea emerges in the search for a socio-economic remedy. It can be traced back to the seventies when the conditions for small and medium-sized enterprises (SMEs) were being discussed in the economic context of stagnating growth rates and lack of renewal (see Olofsson 1986). As the crisis persisted, eyes turned to the international arena to identify solutions that could be transferred to Swedish conditions.
During the 1970s many state officials and university researchers came into contact with the American venture capital market. In the U.S., a fast upswing in the venture capital market had followed from the reduction of capital gains tax from 48% to 20%. They also became familiar with the SBIC, which had been initiated in the late 1950s. Armed with this knowledge, more and more people became interested in the phenomenon of risk investment, and by the end of the 1970s pressure groups including representatives from state organizations like SIND and STU, government department employees, and university researchers emerged with the aim of creating the right conditions for establishing a venture capital industry.  (Fredriksen 1997:21).
By the beginning of the eighties venture capital in the U.S. had lived through a turbulent history, but its continued existence was ensured as the fledgling industry became supported by both political parties as a core component for competitiveness (Avnimelech et al. 2005). Inspired by the expanding venture capital market in the U.S., various forces advocated the creation of Swedish ‘venture capital’, which would effectively stimulate the development of SMEs, especially technological ventures. Field trips by both private capital and state authorities were made to the U.S. in order to observe the venture capital market, and in late 1981, two representatives of the consultancy firm Venture Economics Inc., Norman Fast and Stanley Pratt, the first of several key venture capital individuals to visit Sweden (Fredriksen 1997). In the previous year, a state-led inquiry into the economic situation of SMEs headed by Johan Nordenfalk had been commissioned. In an interim report that was published in 1981, the inquiry emphasised the need to improve the opportunities for attracting external risk capital (as opposed to internally-generated capital for growth), and especially highlighted the American model of Small Investment Business Corporations (SBICs) , which was a particular form of venture capital companies that had emerged in the sixties (SOU 1981). Together with a report published by STU in the same year, the Nordenfalk inquiry suggested the creation of private investment companies according to the SBIC model, as an alternative to state-led initiatives. “People began to think about partnerships between private and state capital and the Department of Industry began to work on plans for a Swedish SBIC.” (Fredriksen 1997:21).
Swedish venture capital tells the tale of how one particular model for venture capital, the SBIC model became the norm. But objectification leaves questions such as the intended purpose and meaning of a particular idea unanswered. Such questions turn attention towards venture capital as it was originally intended, leading us to dwell on the background for venture capital and a pioneering vision that emerged in this context.
Ad-venture capital and early pioneers
Venture capital has perhaps in its crudest form existed throughout the industrial era. In the face of grand projects such as the building of pioneering railway lines across the American continent, of dams, of mines or of canals, consortia of wealthy investors were called for to put up the necessary funding. In 1914, three independent and financially weak companies were financed and merged by a group of wealthy individuals into what became the International Business Machines Company (Hambrecht 1984). At the time, however, it would seem that the term ‘venture capital’ had yet to be coined, as these were not jointly organised investment efforts that extended beyond any particular investment project (cf. Gompers 1994).
So when did we start talking about ‘venture capital’? Reviewing the history of American venture capital, David Hsu and Martin Kenney (2005:13) suggest that the term was first used by the chairman of Dupont Chemical, Lammot DuPont, in the company’s 1938 annual report. Going back to the proceedings of the Investment Bankers Association of America (IBA) 1939 convention, Martha Reiner (1991:201) explains how the President of the Association, Jean Witter, saw venture capital as a “…traditional component of some wealthy individuals’ portfolios—investment in “businesses in the experimental stages”.” Venture capital, in terms of funding allocated to ‘businesses in the experimental stages’, was thus not an unknown phenomenon in the late thirties; however, it was very much associated with the investment role of wealthy individuals, and as such remained to a great extent fragmented and unorganised (Gompers 1994).
Several wealthy families of New York are associated with the early years of venture capital. In a book edited by Udayan Gupta (2000), Benno Schmidt, one of the six original management partners of J.H. Whitney & Co, recalls John Hay (Jock) Whitney’s reasoning surrounding the founding of the firm in February 1946.
He had given a lot of thought to the absence in the economy of any organized source of capital devoted to financing new ideas, ideas that might have great promise but also carried substantial risk. Jock pointed out that neither commercial banks nor investment banks provided such a source of funding, and if corporations found new proposals worthy of funding, they would normally swallow up both the entrepreneurs and the idea. (…) He said he had decided to use $10 million to capitalize a small private firm that would be devoted to financing new enterprises found by the firm to have appeal and merit. It was his belief that a free enterprise economy such as ours would lose its dynamism unless there existed somewhere in the economy a source of new money for prospective entrepreneurs seeking to start worthwhile new enterprises. (:96).
Though Whitney had made the occasional investment before the war, he lacked the organisation that could effectuate the necessary due diligence prior to investments, as well as provide assistance after the fact. Financial advisors were concerned with the sustainability of a firm with no continuing current income, but this did not keep Whitney from going ahead as planned. A first successful investment in a fertiliser manufacturer would seem to have proven the merits of the concept. Initially, Whitney & Co described itself as a private investment company, but because the press insisted on making the reference to an investment banking firm, a new description was needed. Venture capital, with its connotation with risk and adventure, was a well suited suggestion.
Other wealthy families such as the Rockefellers (still active in venture capital investments through its firm Venrock), were also among the early pioneers to allocate funding for investing in new enterprises in a more systematic way. These actors shared a mix of concerns ranging from the financial to the ideological (see Reiner 1991). Perry recounts the motives driving what he calls ‘early venture capitalists’ who were progressive, even visionary:
Other venture capital firms were started by progressive, even visionary founders, like General Doriot. (...) They were motivated by economic and noneconomic factors. Noneconomic factors often took precedence and included the desire to (1) build a viable business; (2) bring technological ideas, goods, and services into the service of mankind; and (3) be part of creating exciting new technologies. (1988:205).
Likewise, in her research on early venture capital initiatives, Caroline Fohlin observes that “While the various venture capital institutions took on different shapes, sizes and focus, they all held at their core the ideal of creating new enterprises for the greater good.” (2005:1-2). Thus, the early days of venture capital were associated with something more than the purely financial trade.
Labelling a solution
Venture capital, in its organised form, is seen by those tracing its origins back through time as an innovation that was instrumental in promoting a positive shift in the role of SMEs in the economy (see Reiner 1991). So what brought about such an innovation? Turning to Reiner’s analysis of the industry’s background, the main motives were related to the financial environment on the one hand, and of an ideological nature on the other. The economic climate preceding the late thirties was glum. The 1929 crash led both private individuals and investment bankers to shun what they perceived as risky investments. “Much capital moved from decision makers who had done venture investing but now were leery of it to decision makers bound by law and tradition.” (1991:201). Following fraud and speculative investment practices, further constraints were placed on institutional investors. With the Glass-Steagall Act of 1933, investment banking was split from commercial banking, and in the following year, the Securities Act created the Securities and Exchange Commission (SEC) which tightened regulation on issuing stock (Avnimelech et al. 2005). Increased taxes, the regulatory environment, as well as the increasing propensity of large corporations to diversify internally strengthened the contemporary belief that independent technology ventures were disadvantaged because of the lack of capital sources for small businesses.
During the 1930’s in both the U.S. and the U.K. there were discussions of the lack of investment capital for small businesses. In the U.K. the 1931 Macmillan Report identified a shortage of private sector funds for supporting small business. The report contributed to a contemporaneous debate in the U.S. about how to provide funds for the small businesses severely affected by the Great Depression. There was little agreement about what types of small businesses should receive funding and the proper vehicles for providing financing. (Kenney 2000:4).
With the New Deal programs, funds were made available to small business through public sources. At first these funds mostly comprised loans, but in late 1939, the small business financing program, the second Mead Bill, called for the federal government to engage in equity financing. However, in many circles, the government’s role in financing new ventures presented a threat to private capitalism.
Financiers began talking of “venture capital” in 1939, as they moved from the crisis of the Depression into the crisis of World War II. They perceived that the past decade’s social and economic turmoil would worsen and jeopardize private capitalism in the United States. Financiers linked the decline of investment in new enterprise to their own decline. Naming the venture capital problem focused attention on solving it. (Reiner 1991:200).
The perceived threat of state intervention triggered a reaction amongst financiers that led to the emergence of a venture capital ‘ideology’, which emphasised the socio-economic benefits of a specialised instrument in the financing of new undertakings. Amidst the fears and concerns of the time emerged a vision for venture capital that went far beyond the safeguarding of economic liberalism, by envisaging an institution with a leadership role for the future.   

A vision for venture capital emerges
As an organised effort to both raise the necessary funds and engage in the financing of new enterprises, the American Research & Development Corporation (ARD) is often held as the real starting-point for the venture capital industry (cf. Bygrave & Timmons 1992). It emerged in post-Depression New England amidst concerns with revitalising industrial activity. During the Depression, the local garment and textile industry was experiencing a severe decline. With big business being blamed for the profound crisis, two political ideas emerged, one emphasising the need for government support to small businesses, and the other calling for a halt to technological progress, blaming automation for the unemployment crisis. “These two separate debates merged in the thinking of a number of leading New England civic leaders who came to believe that the creation of small firms to exploit new technologies could contribute to the solution of the U.S. economic crisis.” (Hsu & Kenney 2005:7). The civic leaders of New England advocated new initiatives of the private sector that would provide funding to firms, in order to create new industries in the region. “Here was an appropriation of populist rhetoric that was repackaged into the recommendation that research should contribute to the creation of new firms and industries.” (:7). At the same time, a group of local bankers in the region had explored the possibility to provide financial support to small business through existing financial institutions, drawing attention to the need for long-term, equity financing – financing which fell outside of the normal function of such institutions. An organisation that specialised in the financing small, innovative firms seemed as the way to go.
Among this group of thinkers was Brigadier General Georges Doriot, a naturalised French citizen and professor at Harvard Business School. Former employee of the future ARD (and Doriot alumni) recalls the birth of the firm:
As a young professor at Harvard, he [i.e. Doriot] knew a lot of powerful people including the president of MIT, the head of Mass Investors’ Trust, and the head of John Hancock. They met in 1939 to define what was to become venture capital. In other words, they were asking if it wouldn’t be useful if there were money and advice available to support the entrepreneurial effort. They actually held their meeting, as I recall, the night the Germans invaded Poland. With the war, they put the whole program aside for seven years. (Charles Waite in Gupta 2000:224).
Though early efforts had been stalled by the arrival of the Great Depression, ARD was established in New England in 1946. One of its co-founders was Ralph Flanders, a New England businessperson who became the first president of the organisation. In an address to the National Association of Security Dealers in Chicago in late 1945, Flanders emphasised how the prosperity of the economy and of the citizens of the country was dependent on the vitality of new initiatives; “We need to marry some small part of our enormous fiduciary resources to the new ideas which are seeking support.” (Bygrave & Timmons 1992:17). Flanders pointed towards the difficulty of making funds available for new undertakings when such funds were increasingly concentrated in fiduciary hands, writing in the year following the birth of ARD that “We cannot float along indefinitely on the enterprise and vision of preceding generations.” (Hsu 2001:95; Gupta 2004:xxi).
American Research and Development Corporation  was something more (else) than a fiduciary, its mission being to “...aid the development of new or existing businesses into companies of importance.” (The Wall Street Journal 1999:15). The selection of its name (and of that of later counterparts in Canada and Europe) reflected the wider relevance that the founders attributed to their vision. Triggered by the perceived need for encouraging and supporting ‘enterprise and vision’ for the future, this vision for venture capital saw fund provision as a necessary complement to the critical role of providing assistance to fledging firms, rather than the primary aim itself.
By the end of World War II, the proponents had decided that a venture capital organization would not only evaluate and assist fledgling firms, but would also have to invest in the firms. In effect, the idea that a venture capital firm would be the source of capital appears to have derived from the recognition that the critical component was the evaluation, assistance, and monitoring functions. (Hsu & Kenney 2005:9).
The founding vision for ARD, though compelling to its founders, was not easy to communicate succinctly as they set about launching a hitherto unproven concept. Retaining the endorsement of new investors proved all the more challenging when no promises could be made of capital gains in the short term.
Raising the initial $5 million for this closed-end investment company proved to be a formidable challenge. Imagine trying to raise that sum today for an unproven concept. Imagine further the enormousness of the task if, despite numerous attempts, you have been unable to convince an underwriter to raise the money on any terms, none of the founding management team would be working full-time, the key management team was led by a professor who planned to continue teaching, the prospectus and presentation made little mention of profit-making objectives, and, last, your primary mission seemed to be “to help build the economy”. Most people experienced in such matters would say it could not be done. (Bygrave & Timmons 1992:18).
Nevertheless, with champions dedicated to the cause, ARD managed to retain funding from institutional investors who had hitherto been unwilling or unable to back risky start-ups: “Doriot and his colleagues embarrassed and enticed these slow-moving entities into changing the way they thought about investing.” (Writer Kristin Lund, in the Wall Street Journal 1999:15). The engagement of corporate and institutional involvement from insurers, industrial corporations, educational institutions and other investors, was based on Flanders and Doriot presenting a vision and purpose for venture capital that recognised the synergistic roles of corporations and smaller ventures:
Doriot and Flanders may have benefited from the renewed energy and spirit in the aftermath of a victorious war, but they also presented a real vision and purpose for venture capital. They didn’t promise easy money, but the rewards for being early investors and initial risk takers could assuredly be enormous… Professor Doriot convinced major industrial corporations to consider venture capital as a strategic investment, not merely an alternative asset class that deserved a nominal allocation. Professor Doriot may have been among the first to recognize the strategic role of the entrepreneurial business in the economy, and the synergies possible between the big corporation and more modest entrepreneurial endeavours. (Gupta 2004:xxi).
General Doriot, who had been instrumental during WWII in the development of new field equipment in collaboration with scientists and industrialists through his position as Chief of the Military Planning Division at the Office of the Quartermaster General (Doriot 1945; Army Quartermaster Foundation 1996), was  initially an adviser to Flanders. As the latter was elected to the U.S. Senate, the professor cut back on his teaching and took on the role of president of ARD (The Wall Street Journal 1999). His course in ‘manufacturing’ at HBS, which he had been teaching since the late twenties, encapsulated much of his thinking regarding the role of industry and technology research, and the necessity to prepare for a future impossible to predict. “...his course on the subject was one of the most popular at Harvard Business School.” (Bygrave & Timmons 1992:17).
The founders put effort into designing and investment instrument that could enable the realisation of their vision, formalising the initiative in a closed-end fund. As such, it offered several advantages for venture capital operations compared with the more common form of open-end mutual fund. Its shares could be offered to private as well as institutional investors, and as an investor needed to liquidate his or her assets, these shares could be offered on the exchange market (Gompers 2005).
The fund that Doriot and Flanders designed was no arcane financial instrument. It was an attempt to design a tool that would finance business development, especially in the uncharted waters of high technology – without government involvement. ARD was also designed to allow public participation. At the time, no such investment vehicle existed, certainly none that was publicly traded, yet Doriot managed to create one. And he persuaded some of the most prestigious financial and industrial institutions of the day to join as investors. (Gupta 2004:xx).
In this sense, the business concept encompassed much of the ‘liability of newness’ of any innovative idea put into practice. However, with the notorious investment in the Digital Equipment Company (DEC), this pioneering concept proved its business merit; a $70,000-worth stake of 77% acquired in 1957 soared to over $400 million as it was meted out to shareholders in 1972. In an interview with French journalist Roger Priouret in the summer of 1968, Doriot characterised the early years of ARD as the ‘winning of a bet’, proving that giving ‘young people with the temperament of business creators’ a chance was in the general interest, also because it could be profitable.
At the end of the war, three presidents of large American companies gathered to establish that there were young people who had the temperament of business creators who did not feel well at ease in big business. To give these youngsters a chance was in the general interest. That’s what the American Research and Development Corporation responded to. With initial funds of 3 million dollars... That may seem as a banal initiative in a country that was already very wealthy. (…) The founders were no philanthropists. They were men from New England who had been taking risks all of their lives and who were taking a final one. They certainly intended to make money and not to do charity work. They won their bet. I believe I helped them do it. Thanks to ARD, we have made at least fifty (dollar) millionaires. (Doriot in Priouret 1970:77-8).  
‘Creative capital’ and a pioneering vision for venture capital
The foundation of ARD has caught the interest of venture capital research because it is seen as the starting point for several of those venture capital practices which have since developed. In particular, it is associated with risk-taking in the form of investments in affiliates who have yet to prove their merit (cf. early-stage investments) coupled with an active involvement philosophy – a type of venture capitalism that Bygrave and Timmons have dubbed ‘classic venture capital’ (1992), or which Perry describes as ‘long-term partners’ (1988). My interest in the ARD initiative at this stage is not primarily as the catalyst for a growing phenomenon, but as a comprehensive illustration of a vision and purpose for venture capital germinating at a time when venture capital was in its infancy.
In the following sections of this chapter, I have combined secondary and primary sources in order to go deeper into the founding vision for an original venture capital initiative that was enacted by the ARD enterprise. This vision relied on two pillars; to build for the future of coming generations and to create better solutions for the fulfilment of present and future needs.
Building for the future of coming generations
Various accounts of General Doriot reveal a man of principle, drive and determination, preoccupied with ‘what if’ questions, particularly relating to an uncertain future (e.g. Gupta 2004). His dedication relied on the belief that business had a greater role to play, a role in building for the future, as expressed in one of his oft-quoted maxims; “Business is not about dollars and cents so much as about building for the future.” This was a challenge that he did not hesitate to raise when meeting people, least of all his own students: “Let us do more than our share for the generations following us. Do we want to build or merely enjoy what others ahead of us have made possible? Really, how can one enjoy anything if one is not building for the future of others?” (Gupta 2004:xxv). Doriot’s strong concern with the future of mankind also transpired in his idea of the Institute of Man, which he shared with his students, but which never materialised:
I have thought that we should have an Institute of Man. This would be a group of outstanding individuals who could evaluate the progress which Man has made. In light of this progress and the background of this progress this group could give some attention to the problem facing man today. From these people the country and its leaders could seek advice. But so far, no one has liked my idea and perhaps our leaders would not listen to such scholars even if the Institute existed. (Doriot in Gupta 2004:20; also mentioned in Doriot 1945).
Building for the future meant applying a time perspective that went far beyond the immediate present. This was mirrored in practices such as fund-raising, where efforts were made to raise capital that would be more ‘patient’ in its expected returns, leading to the founders specifying that half of the initial capital or more should come from institutions. In order to reach this target, ARD was granted exemptions from the Securities and Exchange Commission (Hsu 2001). Relying on a varying group of shareholders, rather than one particular family trust (as other contemporary venture capital initiatives), implied that attention had to be given to maintaining these relationships by rewarding investors for the risks that they took, but not at the expense of the profitability of a venture in the long term (Gupta 2004).
Doriot’s adepts speak of a ‘missionary quality’ that characterised ARD, of making a contribution that went beyond the immediate present. Interviewed by journalist Udayan Gupta, Charles Waite, former ARD employee who joined the company in 1960, recalls how “...we believed we were doing something for the greater good, making America a better place. And it was true...” (in Gupta 2000:231-2). In 1951, Doriot wrote to ARD investors:
It should again be emphasized that American Research is a ‘venture’ or ‘risk capital’ enterprise. The Corporation does not invest in the ordinary sense. It creates. It risks. Results take more time and the expenses of its operation must be higher, but the potential for ultimate profits is much greater. (ARD, 1951) (in Hsu & Kenney 2005:11).
Here the venture epithet took on the meaning of venturing into the unknown, because the effort of trying was in itself meaningful. The founding vision of ARD thus brought together people who saw venture capital as the response to a deeper purpose, and who were expected to give their best within an organisation that offered rewards that were hardly attractive in the financial sense, but that generated a sense of meaning.
Spread hope
Venture capital in terms of venturing into the unknown involved hope for what would be there to enjoy in the future. As ARD reached its first year of operations, Doriot explained the patience that was required in creative investing, emphasising the role of ‘faith’ rather than forecasting in the creative process:
With reference to investments, it is quite early to make definitive forecasts. These young, promising companies are passing the normal difficult periods of early growth. It is hoped that their managements will grow with their businesses and assimilate the different and new problems and worries brought forth by increased size. (…) As always, realizations cost more and take longer than expected. Setting high goals stimulates ability, the fact that they are not always reached quickly suggests patience. (in Gupta 2004:55-6).
The role of a venture capitalist was very much a leadership role, which involved being an ‘institution builder’ who saw work as part of the larger mission of making a better society for all, and of making people achieve things that they  had never thought possible (in Gupta 2004). Faith was an important ingredient in this role of painting the bigger picture and encouraging others to make a difference. Involvement with venture capital would entail not only the satisfaction of seeing something built for the future, but also the disappointment of ideas not materialising as expected. Assisting people who were dedicated to building something was a task coupled with strain and difficulty. An article by Robert Steck quotes Doriot applying the metaphor of a ‘child’ to describe ARD’s involvement with an affiliate, and the nature of the relationship that emerged:
“When you have a child you don’t ask what return you can expect,” he said. “Of course you have hopes – you want them to be outstandingly well in their field. And if they do, the rewards will come. But if a man is good and loyal and does not achieve a good so-called rate of return, I will stay with him. When bankers or brokers tell me I should sell an ailing company, I ask them, “Would you sell a child running a temperature of 104?” (D&B Reports 1994).  
Unmet expectations and adversity were seen as an inherent part of supporting fledgling ventures, rather than evidence of failure. For an affiliate to be abandoned, there had to be a a loss in faith either in the management or in the field of interest, or a complete loss of the venture (ARD memo from 1961 in Hsu 2001). By specifying that they were not ‘in and out’ people looking to realise their investment as soon as an opportunity presented itself, the role of ‘exit’ was thus downplayed.
The patience that was required for building something that had yet to prove its merit was a rare quality to be found in an investor, when public stock promised swift returns: “...to build new companies takes many years. From test tube to tank car: 7 years. Why spend seven years waiting for results when the stock market brings them in a matter of months, sometimes a matter of days.” (The Doriot Collection, book I:30 in Fohlin 2005). Turning attention to what was being accomplished regardless of whether this was reflected in the financial performance at a given moment was thus an inherent part of a venture capitalist’s job description. In an article on quality and the responsibility of managers, former chair of Motorola Robert Galvin recalls an episode when he approached Doriot for advice:  
...he said, “Would you like to see my job description?” He reached into his drawer and picked out a three-by-five card that had obviously been used or shown many times. On that card were eight words: four phrases with a verb and an object in each. And the first of these was “Spread hope.”  (Galvin 1993:3).
The spreading of hope, a prime ingredient of a venture capitalist’s role of leading towards the future, meant that there was dedication to the task as long as it was believed to be useful for this purposes, and to people who were doing their best in this regard: “... our role consists of taking participations in a business which a man without resources of his own wants to create. If the venture succeeds, which occurs most of the time, ARD sells its stock with a profit. If the venture fails, ARD loses.” (Priouret 1970:77-8) . And here the vision for ARD and its concept of creative capital involved venturing into the unknown, with faith, dedication and hope for the future. Only when there was a loss of faith in the people who ran it and the quality of their ideas, would hope be impossible, leading to the necessity to exit an affiliate.
Pursue creative satisfaction
Creative capital was associated with efforts that went beyond the ordinary, with human effort, drive and commitment as essential ingredients. In this sense, it was first and foremost a human enterprise, built on the strengths and weaknesses inherent to human effort, a visionary enterprise that involved a sense of duty and direction, of doing something for the greater good. “Giving every minute a constructive meaning.” (Doriot 1993:141). The concern with improvement was coupled with a strong sense of urgency, recognising the continuous drive towards improvement as a vital driving force in the building of companies in a ‘constructive’ way: “A company’s long range goal is not to manufacture any one product or products. It is to use its assets to fulfill constantly changing needs.“ (:108). Putting resources of all kinds, including human resources, to good use, was a prime preoccupation: “Get maximum out of what one actually has. (processes-products-ideas-men-at all levels, etc.)” (Doriot 1993:44). As Doriot taught in his manufacturing class, the mission of any business, including a venture capital business, was not a particular product or service per se, but the fulfilment of needs which were constantly changing.
The present, or today’s, need is probably or certainly a product. But that is only part of the problem. It is a necessary but intermediate one. The real goal into which the product must fit and towards which our thinking and products must be directed should be a service or the rendering of a service by the products we make. We must fill a satisfaction – a need – serviceable or aesthetic. Goal should be broader than product. (Doriot 1993:24-5).
This shows the dynamic perspective that characterised the founding vision for ARD, where a company existed to fulfil needs in its environment, needs that were constantly changing with the progress of technology, competition, etc. The emphasis for venture capital was on its contribution in terms of creating something, a contribution that would be valuable also in a financial sense if one was patient and willing to await a project’s fruition. Creative capital, playing an instrumental role in the manufacturing of new products, would yield ‘high returns in creative satisfaction’, as Doriot told his students in the introductory lecture of his manufacturing class at HBS:
It takes a strong physical man and a tough-minded individual to produce goods, but if you have these qualities and the determination to do well, if you will not be soft in the face of trial, if you will never be half-hearted and will never shirk your duty, then you will have the privilege of the greatest profession I know: converting plain material into useful, beautiful, helpful products. This takes some of the greatest qualities man possesses, but it also pays high returns in creative satisfaction. (in Gupta 2004:7).
The vision for ARD thus involved the pursuit of creative satisfaction, the satisfaction derived from partaking in an enterprise that ‘achieved things one did not think possible’ in order to find improved ways of meeting constantly changing needs. Though the years surrounding the founding of ARD had seen a rising interest in venture capital in various circles, by 1960, it seemed that most of that interest had been lost with a favourable market climate, leaving investors safe to invest in public stock once again. In his personal notes, Doriot observed that “...at that time—14 years ago—ARD was formed. Everyone wished it good luck – but few people participated, particularly since general business became good and the stock market went up considerably.” (Doriot Collection, Book I:30, in Fohlin 2005). ‘Creative capital’ that was invested in yet unproven concepts that could bring about new improvements to what was already known lost its attraction to the safer harbour of larger, established companies with steady profits. It seemed that the leadership role envisaged by Doriot and his associates was an undertaking that required more dedication than many were willing or able to give.  
Creating better solutions for fulfilling present and future needs
ARD with its vision for creative capital made no effort to position itself as an improved concept or even an alternative to contemporary capital providers. Rather, Doriot’s remarks in connection with the ARD Annual Report in the summer of 1967 reveal an awareness that its goals and practices reflected a philosophy that was difficult for stockholders and other constituents to pigeonhole:
When considering and thinking about ARD’s goals as stated in the ARD report, it must be apparent to stockholders that the type of work carried on in a venture-capital company such as ARD is quite different from the work of most other organizations. (in Gupta 2004:89).
With its main emphasis on assistance rather than financing, ARD compared itself not with a financial institution but with a company that was in the business of manufacturing new products, but relying on a modus operandi of its own; “Manufacturing companies are engaged in starting or launching new products. So is ARD. But there are many differences: ARD does not manage, does not control. It can help and advise, but it can seldom direct.” (in Gupta 2004:89). From the very beginning, the ARD concept was intended to represent a distinct institution that bore little resemblance to contemporary investment companies because it dealt with ‘creative capital’, not only engaging in the creation of enterprises, but also in the creation – ‘starting or launching’ – of new products and services. Investing in affiliates, the essence of today’s definition of venture capital was a vehicle for this creative involvement, rather than an end in itself.
Strive for better forms of life
The ideas behind ARD developed at a time of disillusions (the economic climate of the thirties had brought attention to the need for restructuring and for finding new pathways for the future), but also of technological ‘advancements’ (a boost in new technology opened up for multiple industrial applications). In particular, WWII had convinced the U.S. military of the critical role of technological developments, encouraged by the defence industry at the onset of the Cold War (Avnimelech et al. 2003). This fuelled the development of many technology-based companies in the post-war era.
If the investment and involvement in affiliates was a vehicle for realising the vision for creative capital, what kind of ideas and enterprises were targeted?  The R&D-intensity of ARD’s investments was measured by Hsu (2001), who concluded that the company invested in a high percentage of high-tech companies during its lifetime (73%), noting a decrease in the overall percentage in the second half of its life. On the other hand, he also observed that the company invested in a number of low-tech industries, such as food products (1946-50), professional services (1951-55 and 1961-65), as well as education and media (1966-71). Having worked with innovations at the quartermaster corps during WWII, Doriot’s recognised the potential of science and research in improving quality of life along a multitude of dimensions; “… let us not forget that Science and R and D can lead us into better forms of life not only physically but mentally, morally, politically, and socially.” (1993:43). As such, it was an important driver in the building for the future. However, technological innovation per se was not an end in itself.
The lure of a beautiful technical or scientific future must not lead us to forget that our first job is to get the maximum out of our present investment in machines, men, and relationships. As we do so the technical picture must be developed. Sometimes it is an improvement, an assimilation, or if necessary a radical department. (:42).
Warning against ‘the lure of a beautiful technical or scientific future’ Doriot was concerned that innovation, rather than the fulfilment of a need, should become the prime objective. Referring to a mimeo by David Lample entitled ‘Investing in the future’, Gompers recounts one of the earliest investments made by ARD in 1947, in a company that was established to develop X-ray technology in the treatment of cancer. The reasons for ARD’s investment can be discerned in a comment by Karl Compton, president of the MIT, to Doriot; “They [High Voltage Engineering Company] probably won’t ever make any money, but the ethics of the thing and the human qualities of treating cancer with X-rays are so outstanding that I’m sure it should be in your [Doriot’s] portfolio.” (Lample 1989 in Gompers 1994:6). The focus on ‘better forms of life’ did not mean that ARD’s vision did not envisage making a profit – indeed, financial returns were a necessary element for the viability of the enterprise, and in the case of the X-ray company, ARD’s initial investment of $200 000 was worth $1.8 million when the affiliate went public in 1955. But the profitable aspect was derived from the fulfilment of a need - where a technological innovation would be called for, but never be sufficient in itself.
In 1961, Doriot wrote to stockholders encouraging them to put forth suggestions for investments, particularly emphasising that ARD did not abide by any industrial sector boundaries: “Stockholders and friends are urged to be aware of ARD’s interests and to recommend situations which appear worthy of consideration...There is no single industry or group of industries into which ARD’s funds are directed.” (in Hsu 2001:101). In an article published in Barron’s in 1960, David Loehwing observed that ARD’s investments extended over a wide range of industries, from science-oriented companies to businesses with ‘more mundane tasks’. What most if not all of these ideas had in common was some kind of proprietary technology which was new at the time (Fohlin 2005). Technology in this sense was strongly related to ARD’s identity as a venture capital firm which had more in common with a ‘manufacturer of products’ than a ‘manufacturer of capital’ – finding new and improved ways of meeting needs that were constantly changing. In the introduction of the ARD annual report, Doriot commented more specifically on the investment focus of the firm:
Many of the investments are in technically based companies, but funds have also been invested in such diverse fields as publishing, entertainment, consumer goods, communications, educational supplies and equipment, and consulting and data-processing services. Investment opportunities in any field of endeavor which is felt to be constructive and to possess exceptional possibilities for growth are to be considered. (in Gupta 2004:52-3).
The focus for creative capital investing was thus dual; fields of endeavour that were both constructive – justifying the need for such an idea – and that offered high growth possibilities – justifying the recourse to venture capital assistance.  
December 1963 had seen the founding of the European Enterprises Development Company (EED), following the establishment of the Canadian Enterprise Development Corporation Limited (CED) a year earlier. EED was modelled after ARD, and thus constituted yet another vehicle for the vision of creative capital. Explaining the reason for establishing a European variant of ARD, Doriot argued for the importance of encouraging ‘imaginative and progressive men with ideas and with fresh concepts’:
At this stage in the development of European nations, it is all-important to encourage imaginative and progressive men with ideas and fresh concepts, to create successful new enterprises. This will not only expand production and employment, but also give such men the opportunity to build new companies and develop existing ones. Every day ideas are being developed with industrial and commercial potentialities. It is important that those with promise of success are teamed up with individuals who have the ability to help them germinate, grow and develop into profitable business organizations. (in Gupta 2004:xxix).
This excerpt illustrates the strong belief in the continuous development of new ideas with industrial and commercial implications, which, if identified, could lead to the creation of new entities that could provide those particular services. Building the ‘right’ environment for such people conveyed on the one hand, that such ‘imaginative and progressive’ people might not be recognised, valued and given an opportunity elsewhere, and, on the other, that people with ideas were dependent upon others who could turn them into a viable reality. The proper infrastructure or environment that was needed for the germination, growth and development of a promising idea was of a human kind, where the confidence and continued faith in people by mentors and champions played an important role in the venture development process.
Doriot had a particular liking for the term ‘operator’, as a conveyor of action and effort rather than inertia. “The word operator conveys to me the person who does something with what he can get, even if it is not much good. That is usually the man who wins.” (Steck 1994:58). Venture capital was not primarily about performance, it was about dedication and effort, of striving to make a constructive impact, thereby inspiring others to follow suit. With experience of technological development in the army, Doriot was weary of what he referred to as ‘administration’, which stifled initiative by leading to the “…excessive gathering together of too many engineers and others in large corporations leading to codification of minds and efforts”. (Doriot Collection 1960:30-1 in Fohlin 2005). The vision for creative capital acknowledged the necessity of creating an environment that was conducive to creation, free of those ‘invisible boundaries’ which made people think inside the box of codification and which would come in the way of pursuing better forms of life.
Provide adequate tutelage for future leaders
ARD is renowned for its active involvement philosophy – the ‘Doriot style’ of active investment, “...a balance between active participation in an affiliate in ways which leveraged professional management and advice without overbearing the entrepreneur’s autonomy in decision-making.” (Hsu 2001:103).  The roots for this investment style were to be found in the background for the ARD initiative, where assistance in the building of enterprises was initially discussed without necessarily a financial participation in affiliates. Advise, persuasion, dissuasion, encouragement – all these forms of assistance had one thing in common, namely to help build and to create for the future.
Venture capital, in a formal organization like American Research, can prove its opportunity of success and reduce its chance of failure participating as an active partner in each project. There is always a critical job to be done, because small, new companies live in a dynamic atmosphere, replete with minor crises. There is a sales door to be opened, a credit line to be established, a new important employee to be found, or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always help build. Then, venture capital becomes true creative capital – creating growth for the company and financial success for the investing organization. (Doriot in Gupta 2004:73).
ARD’s prospects were carefully subject to careful screening before investment, in order to assess if faith could be placed in the relevance of the field of interest as well as in the dedication of the entrepreneur. This screening process involved also the board of advisors, which members had been hand-picked with careful consideration. The deep immersion in any prospect investment again reflected the time perspective of the founding vision, making sense when something was created in view of long-term impact. Sharing his venture capital experience with students in his manufacturing class, Doriot recognised that the weakest point of ARD was not the access to technological competence or the ability to assess and evaluate the quality of innovations, but rather the ability to assess the combination of a man and an idea and the potential that could be brought out of such a combination. Human weaknesses on behalf of either ARD personnel or affiliate personnel was the reason behind most of ARD’s failures:
... since our task is to give life to the combination man + idea, we have to try to attempt at determining the type of evolution, of life, of goals, the problems of that particular combination. (...) It is the study of life to take place in the future-under strict and hard competitive conditions. (Doriot 1993:111).
The screening process reflects concern with identifying people of character and integrity who could serve as leaders (role-models) in the fields of interest where they would be operating (such as Ken Olsen of DEC). Former ARD employee Dan Holland who joined the firm in 1969 recalls how much time and effort was spent on getting to know such people (including talking with their spouses) in order to get to know their diligence, vision, experience and dedication.
... mostly it’s like perfume – you can’t really describe it, but when you smell it you know it’s good. (...) The good entrepreneurs had to be hard working, have vision, good experience, dedication. They had to have the ability to find good people, intelligent. There is no easy logarithm that you can plug in a bunch of variables and boom and that comes out to 95-100 he’s good, or 85, below that he’s not. (in Gupta 2004:70).
Creative capital did not seek formal control of an affiliate, because this would usurp the founder’s ownership stake in the business. There was no specific rule that stipulated a fixed percentage for ARD’s share of ownership, as this was tailor-made to the particular situations. “...there are situations where the amount of capital required and the degree of risk involved may necessitate that ARD have a controlling interest during the company’s early years.” (Doriot in Gupta 2004:53). In this sense, ARD’s model for active involvement was a model of relaxed tutelage as people grew with experience. The following example recalled by Doriot illustrates this purpose of setting the stage for people to mature into leadership roles in a business context.
… one rather favourable case started out with a visit at the ARD by two electronic engineers of about thirty years of age: “We would like to manufacture computers with scientific applications”, they explained. Discussions are under way; ARD acknowledges the quality of the prospects and of the two engineers. It establishes a new firm; initially, it is not the great enterprise that the inventors were dreaming of, but one of more modest making and development. “Gradually, it will grow”, we explain to the founders. ARD advances almost all of the capital, but a great proportion of the shares is allocated to the two men. Still in complete agreement, ARD chooses the board of directors and suggests lawyers and accountants. The financial officer and the controller are recruited from the same circle, very wide, of ARD’s business relations. In this way, the main positions are entrusted to men of merit. Initially, the board gathers once every month; ARD requires extended powers, decides upon fixed installations, operating budgets, important contracts. By the end of one year, as success asserts itself, the initial tutelage is deliberately relaxed. The founders acquire more and more autonomy and these two technicians reveal themselves to be excellent business men, because they have had the time to adapt to new problems and a new environment. Hence, ARD increases their participation and accords one to the principal managers at the same time. Six years later, through self-financing, the company which started out with a capital of 350 000 francs, has a turnover of 50 million francs and provides more than 5 million francs in net profits. (Priouret 1970:79-80).   
The involvement with an affiliate did not follow a prefixed plan, because it was believed that any solution would bring forth new and unexpected problems which were yet to be solved - problems which, though tedious in themselves, offered the opportunity for managements to grow into leaders. “It is hoped that their managements will grow with their businesses and assimilate the different and new problems and worries brought forth by increased size.” (Doriot in Gupta 2004:55). Being in a ‘human’ business, where the quality of one’s activities was first and foremost dependent upon the effort and ability of people, creative capital implied that every participation was tailored to fit the specific needs and requirements of a particular situation. “ARD has no specific formula for financing projects. Each investment opportunity is considered separately, and the form of participation is designed to meet the individual requirements of the situation.” (Doriot in Gupta 2004:53). In this sense, an ‘experimental approach to life’ was enacted, were the adequate mixture and dosage to each particular combination of men and ideas had to be discovered.
It will be more a matter of mixture, dosage, preparation, which one, when, with whom under what circumstances. It will depend on their personality, their assets, liabilities, shortcomings, on these characteristics of the people they deal with, on conditions, events, circumstances. (Doriot 1993:27).
In his teaching notes, Doriot conveys his notion of a company and what it stands for, as an imprint of human vision, dedication and effort even if this meant suffering privation and adversity. Failure, a stigmatised word in many cultures, was seen as an opportunity to ‘rise with the occasion’, and as such was more useful than success in the making of businessmen who could lead for the future, who had the urge to keep pushing ahead towards new improvements.
The study of a company ... is the study of something very much alive which falls or breaks up unless constantly pushed ahead and improved. It is the study of men and men’s work, of their hopes and aspirations. The study of the tools and methods they selected and built. It is the study of the conceptions and creations – imagination – hopes and disillusions. … It is a study of success and failure, where success may break men and failures make them. A study of determination of successive goals and of victorious competitive drive towards them. (Doriot 1993:94).
In the creative process, financial success was treacherous when it diverted attention from the pursuit of long-term goals, from the continuous drive towards improvement. The subtle boundary between success and failure was vigilance, keeping a watchful eye on the future, realising the need for change and looking beyond one’s product or position, rather than being content with the present. Growth was not a solution in itself, it was a condition that though marking progress brought with it new problems and worries to be considered. And here we can again allude to the metaphor of a ‘child’, seeing that the role of the creative capitalist was to watch over the growth and development of its children into leaders who pushed for new initiatives, making sure that the necessary preparations for the future were being made even when success was being achieved.
When a visionary vehicle no longer fulfils the vision
The vision for ARD and ‘creative capital’ was a comprehensive philosophy for tailor-made investing, which was designed to generate returns in creative satisfaction, from which financial returns would follow (rather than the other way around). It was a vision that did not place any limitations a priori on a creative process, but allowed for room to create outside of what was given – because it was believed that no great achievement would come from thinking ‘inside the box’. It relied on a combination of ‘ideals and skills’, as expressed by Doriot in a management note: “To run ARD, one needs ideals and skills… There must be great harmony between ideals and skills.” (in Gupta 2004:65). The specialised knowledge and skills of venture capitalists is today often held forth as an argument for the (economic) effectiveness of such actors, when leveraged with the knowledge of cutting-edge technology (e.g. Sapienza & De Clercq 2000). But what is mostly absent from the discussion is the ‘harmony between ideals and skills’, which was what made creative capital into something that was helpful. It was not just about sharp (and complementary) skills; it was also about dedication to a vision (cf. Senge 1990/2006).
In a paper on early venture capital initiatives such as ARD and Greylock, Caroline Fohlin notes the “… difficulty of defining ARD or placing it in the proper ‘pigeon hole’” (2005:4). In his dissertation, David Hsu (2001) examines the practices of ARD throughout its near thirty-year existence until 1972/3, when it was incorporated into Textron Inc., a textile company founded in the twenties which had evolved into a multi-industry holding company. By analysing historical documentation from both private and public sources, Hsu observes that the ARD investment practices did not fit into any clearly defined category of ‘development stage of a venture’ or ‘industrial segment’, suggesting also that these practices did not remain constant over time.  Whilst venture capital firms are commonly differentiated according to strategic preferences for industry diversity, geographic scope (Gupta & Sapienza 1992; De Clercq, Goulet, Kumpulainen & Mäkelä 2001), stages of development (Carter & Van Auken 1994), risk avoidance (Fiet 1995), or quality of technology (Jungwirth & Moog 2004), ARD lived a philosophy that transcended market segmentations.
In hindsight, it would seem that much of ARD’s success and Doriot’s efforts also contributed to the challenges faced by the organisation. The role of success stories for the imitation of ideas is discussed by Sahlin-Andersson (1996), though she argues that such imitation is seldom based on direct experience with what is imitated and referred to. In the case of ARD, the imitation of its practices was fuelled by direct personal exposure to the teaching of Georges Doriot, whether in his role as a Harvard professor or as the president for ARD. ”Many of the early venture capitalists, including Arthur Rock, Peter Crisp, Charles Waite, and Steve Lazarus, got their venture capital education at Harvard Business School, at the feet of General Georges Doriot.” (Gupta 2000:6; see also Kenney 2000). The financial success of the DEC investment brought about a wave of imitation, not as the adoption of the visionary elements behind ARD, but in terms of particular ARD practices becoming models and presentations for others to adopt. Thus, the dynamic aspects of the founding vision for creative capital, which relied on tailor-made solutions that would fit with the particular situation at hand rather than ready-made recipes for success, was lost on the imitating crowd - who became followers of practices rather than leaders in the way that Doriot and his associates had envisioned. As Guje Sevón (1996) observes, it is success that draws the attention in a Western society where winners are celebrated. The enormous increase in value of ARD’s shares in Digital Equipment Corporation provided a success story that celebrated the financial merit of risky investments, encouraging the belief that venture capital was a business that promised high compensations for those who could seek out the next DEC. “The concept of the “home run” in venture capital was synonymous with DEC and the term would become pervasive in the industry during the 1980s and 1990s. Everyone wanted to finance the next DEC.” (Gompers 1994:6). This was soon fuelled by other success stories, such as that of Apple Computers or Genentech, leading Bygrave and Timmons (1992) to comment on the resilience of the axiom of ‘pursuing the superdeal’ among venture capital investors. But the vision for creative capital had little in common, however, with the myth of the ‘superdeal’. ARD’s involvement with DEC was characterised by a strong emphasis on continuous development by reinvesting profits into the business (see Gompers 1994). The circulation of success stories drawn from the risky undertaking of ARD, emphasising the allure of immediate profits meant that the legacy that was passed on constituted a selected, even distorted variant of Doriot’s venture capital philosophy. Reflecting on the venture capital phenomenon, Doriot observed to his stockholders that the meaning of venture capital had shifted from the manufacturing of products to the manufacturing of capital, thus coming closer to practices of investment banking which pioneering venture capitalists had disclaimed:
Disillusions 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 considered as a reward for a constructive task well done. Manufacturing capital gains seems to be of far more importance than manufacturing products. As a matter of fact, in many cases the latter seems to be of little importance. (in Bygrave & Timmons 1992:321).
Though the outstanding financial success of the DEC investment led to wide-spread interest for this type of activity, not everyone had a heart for such a pioneering vision. In a management note in the late sixties, Doriot articulated these concerns:
Whether we like it or not, we must realize that most people did not think that ARD had any future. Then suddenly we became fashionable and everybody went in venture capital. We were never very competitive from a compensation viewpoint. We have a hard time getting the type of men we should have and want. (in Gupta 2004:66).
The financial model of a closed-end fund structure presented numerous advantages (to venture capital investing) compared to the more familiar open-end funds at the time. Investors who wished to no longer hold the fund need not be reimbursed for their initial investment, because these shares were liquid and could be offered to other investors on a public exchange.  In this sense, a venture capital firm could make investments in illiquid assets, secure in the knowledge that they need not return the investors’ capital in an ‘uncertain time frame’. Besides, any class of investors was permitted to hold shares in a closed-end fund according to SEC regulations. However, though the closed-end fund structure made sense to ARD founders at the time, it presented some unexpected drawbacks. When shares were offered on a public exchange, brokers sold the shares to ‘inappropriate investors’, in particular those who had a need for high current income instead of long-term capital gains, and were thus relying on the provision of high dividends. Such expectations were reinforced by the promise of high profits made by unscrupulous brokers. (Gompers 2005).
In the early sixties, Doriot called for a return to the origins of the initiative, writing that “…obviously we must work more aggressively and effectively. (...) We must be more creative. We must be young again.” (Doriot Collection 1961:76 in Fohlin 2005). The reflection shows that the ARD vehicle was losing its vitality as the allure for ‘quick money’ elsewhere drew dedication away from building for the future. On the whole, the ARD experiment was financially successful (see statistics in Fohlin 2005). But with the venture capital experiment proving its commercial merits, compensation issues were high on the agenda, as employees saw opportunities to be better compensated elsewhere.
Optical Scanning eventually went public and was a large success. ARD went from an exposed capital position of about $3 million to having a gain of over $20 million, which was a lot of money at that time. It went from being a burden to a big win in about three years. I had made a very substantial contribution to that company. The way I had done it was by getting along with the entrepreneur… He and I had a lot in common, and he had confidence in me, and I in him. We made it work together. The CEO’s net worth went from zero to $10 million, and I got a $2,000 raise. I agonized a lot over that. I loved what I was doing, but I thought I should be somewhere where I was compensated adequately. And so that was what eventually led to my leaving the firm and moving to Greylock. (Waite in Gupta 2000:232).
Struggling with the compensation issue, ARD suffered from restrictions imposed by the SEC on fund compensation practices, as it saw many of its investment officer leave to start rival firms (Hsu 2001; Gompers 2005; Hsu & Kenney 2005). Without few ‘men of merit’ in sight, ARD was no longer an effective vehicle for fulfilling the vision for its founding, namely that of pursuing the creation of new and improved ways of meeting changing needs.
ARD as a vehicle for the founding vision of Doriot and his associates came to an end in the early seventies. By then Doriot himself was in his seventies. Trapped in a ‘closed end fund’ structure, with investors calling for immediate returns and talent walking out the door, the ARD vehicle was incorporated into Textron (though Doriot remained involved with some of its affiliates, such as DEC). Many accounts of the history of venture capital, if not all, give credit to the ARD initiative as a legacy for the phenomenon that subsequently emerged, referring to Georges Doriot as ‘the father of venture capital’, and the foundation of ARD as a landmark in venture capital history (e.g. Bygrave & Timmons 1992; Hsu 2001). As an original ‘seed’ from which followers could learn, the ARD vision for venture capital left an imprint on venture capital history that resonates into the twenty-first century, a pioneering vision that came to impact the socio-economic landscape, clearing a pathway for others to follow.
Pioneering (venture) capital from the receiving end
Doriot and his associates used the labels of ‘venture capital’ and ‘risk capital’ in order to emphasise the venturing nature of their activities. Having dwellt on the initiative of Creative Capital and its pioneering role of the emergence of a venture capital phenomenon, it is time to summarise the implications of the founding vision for ARD from the receiving end.
Pioneering (venture) capital captures a vision where capital is one of many ingredients in the nurturing of ideas and people that will bring about leadership for the future. Here, focus lies on bringing forth ventures that will fulfil needs in such a way that our forms of life are improved for the better. This kind of venture capital will design participation according to the needs and circumstances of the particular case. As the founder of an affiliate, your venture will be guided in view of reaping the fruits of creative satisfaction derived from making a constructive contribution of your own. You will be challenged to keep pushing even in the face of privation and adversity, as ‘failure’ will test your dedication and provide the opportunity for maturing into a leadership role. If or when you hold this cost of personal effort to be too high, your venture will no longer hold its function as a vehicle for a pioneering vision.
This vision for venture capital is about making a difference through pioneering initiatives that will generate something for others to build on. As such, it seeks to enrich not only in financial, but in creative terms, by fuelling efforts towards new improvements.
Having uncovered and analysed different founding visions for the Lucina, Acacia and ARD initiatives, I will now discuss what we can learn from these stories regarding visionary elements and their implications.

Chapter Eight