Book Summary: “Creative Capital” by Spencer E. Ante

Title: Creative Capital: Georges Doriot and the Birth of Venture Capital
Author: Spencer E. Ante
Scope: 3 stars
Readability: 4 stars
My personal rating: 4 stars
See more on my book rating system.

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Topic of Book

Ante traces the remarkable life of Georges Doriot.

My Comments

Though I do not typically read biographies, I enjoyed this one. Doriot had a remarkable life and played a key role in founding one of the most important sectors of American capitalism: venture capital

Key Take-aways

  • George Doriot, a Frenchman, played an important if uncelebrated role in American capitalism.
  • Among his other accomplishments, Doriot:
    • Was the most important professor in the first twenty years of the Harvard Business School
    • Played an important in managing the supply chain for the US Army during World War II
    • Founded ARD, the first modern venture capital company in 1946.
    • Founded the first and one of the today’s most important business schools in Europe: INSEAD

Important Quotes from Book

Venture capital has existed in one form or another since the earliest days of commercial activity. The Spanish monarchy and Italian investors who financed the transatlantic voyage of Christopher Columbus were, in a sense, venture capitalists. But it wasn’t until the second half of the twentieth century that venture financing became a professional, large-scale industry. And the man who led that transformation was Georges Doriot.

Born on September 24, 1899 in Paris, Doriot was the son of an engineer who helped build one of the first automobiles for the Peugeot Motor Company. When I visited Doriot’s surviving relatives in Paris, I learned that Doriot’s father, Auguste, was also an entrepreneur himself who, in the early twentieth century, launched Doriot, Flandrin, Parant, an innovative car company.

In 1921, Doriot came to America on a steamship. Even though he had no friends or family in the United States, never graduated from college, and dropped out of graduate school, the Frenchman became, arguably, the most influential and popular professor at Harvard University’s Graduate School of Business. Over three generations, Doriot taught thousands of students, many of whom went on to become executives at the world’s top corporations. He called his course Manufacturing, but it was really his philosophy of life and of business. At Harvard, Doriot became a Yoda-like figure, dispensing wisdom to an ever-growing group of disciples.

Doriot was one of the century’s most visionary thinkers. He was early to recognize the importance of globalization and creativity in the business world. And decades before economists appreciated the value of technology, Doriot realized that innovation was the key to economic progress. “A lot of the things that were attributed to Peter Drucker were Doriot’s ideas,” says

During World War II, Doriot played a critical role in the Allied victory— and learned how to become a venture capitalist. As the head of research and development in the Office of the Quartermaster General, Doriot led a revolution in the military by applying science to the art of war. Under his command, the U.S. Army found substitutes for critical raw materials, and developed dozens of innovative items such as water-repellent fabrics, cold weather shoes and uniforms, sunscreen, insecticides, and nutritious compact food, including K-rations. In one confidential project, Doriot oversaw the invention of Doron, lightweight plastic armor that was named in his honor.

Indeed, during the postwar period, Doriot went on to found a number of important institutions. In 1954, his vision of a peace-time research organization for American GIs was born with the opening of the U.S. Army Soldier Systems Center in Natick, Massachusetts, a research lab dedicated for the last sixty years to providing America’s soldiers with the world’s best equipment. In 1959, his dream of a European business school came to life with the Institut Européen d’Administration des Affairs (INSEAD), today’s leading European business school.

In hindsight, it is Doriot’s work running ARD that truly distinguishes him as a twentieth century giant. In 1946, Doriot was recruited to run ARD by a cadre of New England elites.

Fresh from the U.S. victory in World War II, these luminaries conceived ARD as a vehicle to revive New England and the U.S. economy. In their minds, ARD would solve a major imperfection of modern U.S. capitalism: new companies were starved for money and professional management. It’s hard to imagine these days, with billions of dollars swimming around the globe, but after the war, entrepreneurs had a difficult, if not impossible, time raising capital. Banks were ultraconservative, reluctant to lend money to unproven ventures. Sure, rich families like the Rockefellers invested in new companies but they were few and hard to reach. ARD promised to break down the walls of an elitist, insular world, reviewing ideas from thousands of companies across the country.

One child, an ambitious little outfit called Digital Equipment Corporation, grew to become a giant, cementing the legend of ARD and Doriot.

Just as important, ARD’s support of Digital and dozens of other unproven little companies ushered in a new era of corporate culture.

A recent study by the National Venture Capital Association found that U.S. venturebacked companies between 1970 and 2005 accounted for ten million jobs and nearly 17 percent of the nation’s gross domestic product.

Doriot was the prophet of this new “Start-up Nation,” the leader of a social and economic crusade that democratized the clubby world of finance. More than any other person, Doriot—through his teaching, writing, and leadership in the military, academic, and financial worlds—pioneered the transition to an economy built on entrepreneurship and innovation. For playing this role, Doriot should be revered as much as other well-known business titans such as J. P. Morgan, John D. Rockefeller, or Andrew Carnegie.

Today many financiers and entrepreneurs assume the west coast always dominated the VC business. They simply don’t realize the industry was pioneered by ARD and a few other Northeastern firms in the three decades following World War II. But the rise of the West was far from predestined, and was not even obvious to the industry’s movers and shakers more than thirty years ago.

So why did Silicon Valley take over leadership of the venture capital industry in the 1970s? Part of the answer is in its geography and history. In pre–World War II America, the Northeast enjoyed a regional advantage based primarily on its technological and financial superiority. MIT was the nation’s top university for science and technology. Harvard Business School was the undisputed leader in business education. And New York was the financial capital of the world. Combine all of those ingredients and it goes a long way toward explaining why ARD was able to grab an early lead in the venture game.

After the Allies won World War II, the Northeast’s entrepreneurial advantage grew as Boston became the nation’s epicenter of military research and development. Other than the Manhattan Project, MIT ran arguably the two most important government research labs of the mid-twentieth century: the Radiation Laboratory, a division of the National Defense Research Committee founded in 1940, which invented much of the radar technology deployed during World War II; and the Lincoln Laboratory, founded in 1951 with funding by the Department of Defense, which developed some of the first computers and later gave birth to the first minicomputer company, Digital Equipment Corporation.

But in the 1960s, the West Coast began to take over the tech industry. A hospitable climate and a greater acceptance of ethnic diversity certainly gave the west an edge in attracting creative talent. But higher education was the key. The University of California and California Institute of Technology by then had gained a reputation for cutting edge research in science and engineering. Much of the credit for the creation of Silicon Valley, though, belongs to a visionary professor and provost of Stanford University, Frederick Terman. In a move equal parts genius and chutzpah, Terman stole the MIT playbook and used it to establish the west coast as a center of technological and entrepreneurial excellence. The crux of his vision was forming a nexus between academia and business—the key to rapidly transferring technology from the research lab to the marketplace.

West coast venture firms will happily take credit for inventing many of the key attributes of the venture business. But that’s not the entire story. Kleiner, Perkins, for example, is often credited with being the first venture firm to practice hands-on management, first to organize portfolio companies to create a sort of keiretsu (a set of companies with interlocking business relationships), and also first to implement corporate governance measures such as distributing audited quarterly and annual reports. In truth, ARD had pioneered and been using these practices for more than two decades before any other west coast firm.

While Doriot and ARD showed the world how to build innovative companies, Silicon Valley’s venture firms were the first to create entirely new markets or industries from scratch. Kleiner, Perkins and Sequoia Capital showed the way.

While the west coast VCs followed Doriot’s lead and pushed the venture industry to new heights, policy makers, the bane of Doriot’s existence, boosted the market with two bold strokes. First, in 1978, Congress cut capital gains taxes to 28 percent, from 49.5 percent. And then in June of 1979, after lobbying by pension fund managers, venture capitalists, and entrepreneurs, the U.S. Labor Department clarified the “prudent man” rule of the 1974 Employment Retirement Income Security Act. The old rule held that pension fund managers could only make investments that a “prudent man” would make. Consequently, many pension fund managers avoided venture capital. The new rule, however, allowed fund managers to take into account the diversification of their entire portfolio when determining the prudence of an investment.

The ruling opened the floodgates to venture capital. Pension funds in particular poured rivers of money into the industry. In 1978, 23 venture funds managed about $500 million of capital. By 1983, there were 230 firms overseeing $11 billion. Almost one-third of that new money came from pension funds, up from 15 percent in 1978. Many of the firms dreamed of finding the next Digital Equipment Corporation and repeating the success of American Research and Development.

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