A History of Venture Capital

Service des relations industrielles (SRI) EPFL
A History of Venture Capital

Herv Lebret January 4, 2007
The Ancestors pre - 1958
1957 The Traitorous 8
The eight men were Julius Blank, Victor Grinich, Jean Hoerni, Eugene Kleiner, Jay Last, Gordon Moore, Robert Noyce and Sheldon Roberts.
Shockley was so difficult with his colleagues that 8 left Shockley Labs. to create a new company
1957 Arthur Rock
Arthur Rock, a banker on the East Coast, is contacted to help them raising $1.5M; an amount he will find in the person of Sherman Fairchild, the largest individual shareholder of IBM and owner of Fairchild Camera. In 1957, Fairchild Semiconductor is founded.
And also
ARD DGA
William Draper II (VP Dillon Read), Rowan Gaither (founder of Rand) and Frederick Anderson (retired general) launch DGA with Rockfeller Group money in 1958 Georges Doriot (a Harvard professor) founded American R&D in 1946 in Boston.
The Ancestors investments
Fairchild Semiconductor was very successful and reached 12,000 employees but the founders were bought back their shares by Fairchild they still became wealthy.
ARD financed High Voltage (a $1.8M return for a $200k investment) and Digital Equipment in 1957 (a $70k inv. worth $355M after 14 years). ARD stopped in 1972. DGA seems to have been less successful though and closed in 1969 when Rockefeller withdrew.
The First Generation Part 1 1958-1965
The First Generation

1961 - Davis & Rock
Davis joined Rock. They raised $3M with Moore, Noyce, Kleiner among others
Tommy Davis, a Harvard-educated lawyer and then vice president of Kern County Land Company. Davis wanted to leave the Land Company because it had little interest in high-technology investments though Davis had already made a successful investment in the high-technology firm, Watkins-Johnson
Both Rock and Davis are Harvard Alumni, and Rock was a student of Doriot
1962 Draper and Johnson
Bill Draper III who was working since 1958 with his father at DGA and Pitch Johnson (a former Doriot student) launch the Draper & Johnson investment company
And also
Reid Dennis, Don Lucas
Reid Dennis goes back to 1961 to remember the time he persuaded his then-employer to make its first venture capital investment, although the Fireman's Fund Insurance finance committee didn't call it venture capital. It was a "special situation."
Don Lucas a General Partner at DGA will help in the restart of National in 1967; at that time, he has already left DGA to invest on his own. The Group is an informal group of individual investors including Dennis, but also John Bryan, Bill Edwards and others
Some 1st gen. investments

1961-1965
Rock & Davis $3M fund returned $100M. It invested in Scientific Data Systems (SDS), a company Xerox bought to compete against IBM, in Teledyne (ex-Amelco) and later in Intel when Moore and Gordon left Fairchild.
Draper&Johnson will invest in Tandem
One member of the Group, Dennis, investment was $1020k? in Ampex which will be worth $1M in the end.
Fireman's Fund Insurance invested $1 million in an optical-character recognition company, Recognition Technology. At the height of the market, that investment was worth over $40 million, which, in the 1960s was an outstanding performance. By the time it was all over, Fireman's probably realized a $15 million or $16 million profit on the investment.
Don Lucas invested in the restart of National. Much later, he invested in SDA (Cadence) and Oracle. He also seems to have been a mentor to Costello and Ellison, 2 famous entrepreneurs.
The First Generation Part 2 1965-1972
1965 Sutter Hill, AMC

Johnson and Draper go on their own: Johnson launches AMC - the Asset Management Company (still active)
Draper launches Sutter Hill (also still in business) with Paul Wythes (Beckman, Honeywell) and acquires the assets of J&D. Bill Draper will have a long career and will also launch Draper International in 1996 and Draper India in 2001.
1969 Mayfield, Venrock
Tommy Davis leaves Rock to create Mayfield with Wally Davis (no family relation). First fund is $3.5M.
Rock may have helped in the creation of Venrock, the Venture arm of Rockfeller. Arthur Rock will go on his own and still does with A. Rock and Co. Rock is to become the VC icon (Time Front Page in 1984)
The First generation
1970 Palo Alto Investments
Jack Melchor who had founded MEL Labs in 1956 and Burt McMurtry after 10 years at Sylvania found together Palo Alto Investments
The company will return $100M out of $3.3M in investments like Rolm, Triad,

1965-70 - Boston
Willian Elfers leaves ARD as Doriot does not let control and creates Greylock with Daniel Gregory and Charles Waite.
W. Elfers
C.Waite
(From left to right) Howard E. Cox, Jr., Charles P. Waite, Henry F. McCance, Daniel S. Gregory, William Elfers.

1965-70 - Boston
ARD alumnus Peter Brooke (then at FNB Boston) launches TA Associates in 1968 as a division of Tucker Anthony, a regional investment bank.
ARD alumnus Willian Burnes co-founds Charles River Venture in 1970.
Some 1st gen. investments

1965-1972
The Giants 1972-1978
Kleiner Perkins
1972
Thomas Perkins
Eugene Kleiner
Tom Perkins (HP and former Doriot Student) and Gene Kleiner (Fairchild and Investor in Davis & Rock) raise together their first fund in 1972.
They consider themselves as the first VCs with an industry and entrepreneur background
Sequoia
1972
Don Valentine, a co-founder of National and Fairchild marketing director creates in 1972 the VC arm of the Capital Group, later named Sequoia.
About valuation When people come as a team (usually it is three or four people and typically heavyweight on engineering), it is a complex process. But I think all of us have seen it in the earlier days, times when I can remember saying, "Well, look, we'll put up all the money, you put up all the blood, sweat and tears and we'll split the company", this with the founders. Then if we have to hire more people, we'll all come down evenly, it will be kind of a 50/50 arrangement. Well, as this bubble got bigger and bigger, you know, they were coming and saying, "Well, you know, we'll give you, for all the money, 5 percent, 10 percent of the deal." And, you know, that it's a supply and demand thing. It's gone back the other way now. But, in starting with a team, it's a typical thing to say, well, somewhere 40 to 60 percent, to divide it now. If they've got the best thing since sliced bread and you think they have it and they think they have it, you know, then you'll probably lose the deal because one of these guys will grab it. Transcript of oral panel the Pioneers of Venture Capital September 2002
Kleiner Perkins
30 years of activity
Perkins and Kleiner will be joined by Caufield and Byers (from AMC)in 1977 and the partnership becomes KPCB.
Later come famous icons John Doerr (Intel) and Vinod Khosla (Sun founder)
Sequoia
30 years of activity
Joining Valentine, the firm will grow with famous to-become partners.
Pierre Lamond (National) - 1981 Mike Moritz (Time Magazine) 1986
Doug Leone (HP, Sun) 1988
The Reid Dennis Legacy

1974
Reid Dennis, Burton McMurtry (Palo Alto Inv.) and Burgess Jamieson (Westven) found Institutional Venture Associates (IVA) in 1974 with American Express money.
David Marquardt joins as an associate.
The Reid Dennis Legacy

1976
Then Dennis launches Institutional Venture Partners (IVP) in 1976.
The same year, McMurtry and Marquardt found Technology Venture Investors (TVI) with James Bochnowski (Shugart Assoc.)
Later join Pete Thomas (Intel), James Katzman (Tandem) Robert Kagle (BCG)
The Giants success stories

1972 and after
Some investments of the Giants

1974 and after
Hits and misses

from a couple of interviews
Venture Capitalist Arthur Rock Pitch Johnson Bill Draper Burton McMurtry Dennis Reid Don Valentine Tom Perkins First Big Hits SDS, Teledyne Bool and Babbage, then Tandem Qume Roam Recognition Technology Atari but also Apple, Cisco Tandem
First Big Miss Bool and Babbage, Compaq Apple Tandem Sun Apple
The Maturity 1978-1993
The new players

1976
DuBose Montgomery was a founder of Menlo Ventures in 1976. Carlisle joined in 1982 and Jarve in 1985
1978
Founders Dick Kramlich (Arthur Rock & Associates ) Frank Bonsal (Alex Brown) Chuck Newall (T. Rowe Price)
Ed Glassmeyer cofounded in 1978 with Stewart Greenfield of Oak Investment Partners.
The new players

1981
Bill Bowes is the founder and prior to founding USVP, Bill was the founding shareholder (and its first employee) of Amgen
1981
Sevin Rosen was founded in 1981 by L.J. Sevin (Mostek) and Ben Rosen (TI)
1982
Paul Ferri, a venture capitalist for more than 30 years, was the founding partner of Matrix Partners in 1982. Prior to Matrix, he founded Hellman Ferri Investment Associates (1977 to 1982) and was a general partner of WestVen Management (1970 to 1978).
The new players

1983
In 1979, Adler & Company of New York established an office in Silicon Valley. In 1983, two Adler partners, James Swartz and Arthur Patterson, spun-off to create the bi-coastal firm, Accel Partners, having offices in New York and Silicon Valley.
1983
Bill Davidow, SVP Sales & Marketing at Intel launches MDV
1984
Gregory Avis
Roe Stamps
Stephen Woodsum
The new players

1984
Rick Frisbie, founder of Battery Ventures
David Morgenthaler founded the firm in 1968. Morgenthaler began raising institutional funds in the 1980s
1985
Tim Draper (3rd gen. Drapers; from Alex Brown) founds Draper associates and is later joined by John Fischer (from ABS ventures) and Steve Jurvertson (HP)
Some investments
1978 and after
The New Kids Around the Block
1993-2005
Benchmark Capital
1995
Bruce Dunlevie Andy Rachleff
Bob Kagle
Kevin Harvey
David Bierne
In 1995 Bruce Dunlevie and Andy Rachleff, two veterans of the industry (from MPAE, Merill Pickard, Anderson & Eyre), decided to create their own company, Benchmark. Their goal was to have a firm with a "fundamentally different architecture," with no one person at the top. The men had connections, money and their own brain power and they immediately set to work. They added two more partners to their ranks in very short order, Bob Kagle from the venture capital world and Kevin Harvey from the technology sector, and then brought in David Bierne, who had built a highly successful executive search business centered around technology.
August, Foundation
Lightspeed, Redpoint
Marquardt (TVI) & John Johnston (TVI, H&Q) launch August in 1995.
Jim Anderson (the A in MPAE), Kathryn Gould (Oracle), Bill Elmore (Inman) launch Foundation in 1995.
Redpoint was founded in 1999 by top partners each from Brentwood Venture Capital and IVP
The VC arm of Weiss, Peck & Greer Venture Partners (1971) spun-off in October 2000
Some investments
1995 and after
Some historical and economical perspective
1959-2005
Some key drivers

What is the real impact?
1957: some great IPOs: HP, Varian
1958: The SBIC (Small Business Investment Corporation) act provides federal fund matching and will enable the dramatic increase of venture capital. The different structures of VC funds (LPs,) probably had an impact of its dynamics. 1974: The oil crisis together with the new ERISA act that mandates criminal penalties for pension fund managers who lose money with high-risk investments nearly stops inv. in venture capital 1979: A new ERISA act which decreases fiduciary responsibility together with a good IPO market in 1980 (Apple, Genentech) creates a new inflow of money 1983: Too much money for two many companies: the Disk Drive companies crash. Venture Capital matures in the 80s. The semiconductor industry competes with Japan and lay-offs. The crisis will end with 1993: the beginning of the Internet
A genealogy
1960
ARD
Arthur Rock
Fairchild
DGA
The Group & Fireman Don Lucas
Greylock CRV TA Assoc. Mayfield

Intel
Draper & Davis & Rock

National
Johnson Sutter Hill AMC

HP
Bryan& Edwards
Venrock
1970
BankAmerica (Westven)
PAI
Menlo USVP
1980
Oak NEA
Sevin Rosen
KPCB
Sequoia
IVA IVP DFJ TVI
Brentwood MDV
Accel Summit Battery

Morgenthaler
1990
Matrix MPAE
August Lightspeed Redpoint
Benchmark Foundation
The SBIC Ups & Downs

1959-1993
Source: Creating Modern Venture Capital: Institutional Design and Performance in the
Early Years by Caroline Fohlin
The maturity
The 1980s
The late 80s brought maturity, but was also a big crisis for technologies. The semiconductor companies cut their work force and the technology & VC sectors suffered until 1993 or so.
Ne w C o m m it m e n t s t o V e n t u r e C a p it a l Fu n d s in C o n st a n t 1 9 9 3
Me dia n re t urns of v e nt ure c a pit a l

35 30
$ Billions
7 6 5 4 3 2 1 0 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 Year
25 20 15 10 5 0 1973 -5
1975
1977
1979
1981
1983
1985
1987
1989
year
Source: The Rise and Fall of Venture Capital, Gompers
The Impact of Venture Capital

1993
Source: The Rise and Fall of Venture Capital, Gompers
The Internet bubble

2 .3 2 .1 1 .8 1 .6 1 .9 1 .7 1 .7 1 .6 1 .6 2
The 90s enthusiasm and 00s crisis

Me dia n m ult iple s ( 'x ')
2 .8 2 .2
1 .4 1 .1 0 .7
0 .6
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Med ian I RR ( % )
50 40 30 20 10 0 1985 -1 0 -2 0 -3 0 Year 1987 1989 1991 1993 1995 1997 1999
The recent numbers may not be accurate as they are too recent; they however some negative effects of the Internet bubble.
Source: The Venture Capital Industry Report, Dow Jones
The Nasdaq and the VCs

1971-2006
4'500 4'000 3'500 3'000 2'500 2'000 1'500 1'000 500 0 1971 1976 1981 1986 1991 1996 2001 90 80 70 60 50 40 30 20 10 0
1974: the oil crisis and ERISA act 1984: the HDD crisis 1990: US recession and declining IRRs 2001: the Internet crash
100
Natural scale
Nasdaq ( end y ear)
VC f unds ( $B)
10'000
1'000
10
100
10
0. 1
1 1971 1976 1981 1986 1991 1996 2001
0. 01
Source: Compilation HL
Log scale
Nasdaq ( end y ear)
VC f unds ( $B)
A chronology of funds (1/2)
Fund number and year of creation
A chronology of funds (2/2)

Size of funds (in $M)
Notes 1: fund 2000 back to $471M 2: fund 2001 back to $830M 3: fund 2001 back to $450M 4: fund II (1981) $45M, III (1984) $126M 5: fund 2000 back to $600M 6: fund 2000 down to $650M, then $450M
A subjective Top VC list

TOP US VCs
Mohr Davidow
16'000 14'000 12'000 10'000
Redpoint DFJ Benchmark USVP Crosspoint Brentwood Accel Sevin Rosen Oak Sierra NEA Matrix CRV Austin Sequoia Onset Interwest Menlo IVP Battery Mayfield
$M
8'000 6'000 4'000 2'000 0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
KPCB
Year
And the returns?

Exceptional IRRs
Although the data are not so easy to obtain (the numbers below are not fully consistent), the VC world has generated exceptional returns. The individual success stories are known. Some previous slides give some more numbers. The reader can compare to the typical Wall Street numbers
Israel 1992-2005
The Israel VC size
The largest Israel VC funds
Israel success stories
and Europe? 1972-2006
A list of European funds
Timescale
1996-2005
Timescale
1996-2005
8'000 7'000
Wellington Viventures Ventech TVM Sof innova Siparex Quester Prelude Polytechnos
6'000
Partech Partcom (Iris) Nordic VP Logispring Kennet
5'000
Innovacom Index IDG Holland Gilde
Galileo
4'000
Eqvitec Ealy bird DVC DFJ eplanet Doughty Hanson
3'000
Crescendo CDC Innovation Capricorn Capman Benchmark
2'000
Banexi Auriga Atlas Apax GE Apax FR Apax UK
1'000
Amadeus Alta Berkeley ACT Accel 3i
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
And a few people

a relatively recent activity
The first attempt of Doriot in the UK, Technical Development Corporation, launched in 1962, was sold at a loss to the ancestor of 3i. A second attempt in 1965, European Enterprises Development (EED), set up in Paris, was more successful despite an unsupportive environment. The financial uncertainties of mid-70's led it to stop its activities in 1976. Its example however had led a number of institutions to get interested in the activity. From 1977, the EEC started to study action plans to finance enterprises, inter alias high tech start-ups.
Founded in 1972 by Christian Marbach and Antoine Dupont Fauville with strong links in the USA: Peter Brooke and Jean Delage (TA Associates) will be critical. 22MFF helped by a law on Venture Capital.
http://www.europeanvc.com/history.htm
And a few people

Sir David Cooksey was the Founder of Advent Venture Partners in 1981 and was Chief Executive from 1981 to 1987 and Chairman from 1987 until his retirement in 2006.
Bryan Wood Founder 1982
Michiel de Haan Founder 1980
1982
Vincent Worms and Thomas McKinley
TVM launched in 1983 with 87M A US company created in 1969 by Alan Patricof which has a European presence since the 80s
Founded in 1945 by British banks; the 3i group was created in 1987 when the banks sold their stakes to a public limited company.
http://www.europeanvc.com/history.htm
And a few people

1997
2000
1998
2001
Some European deals
Some historical perspective archive.org
1996-2000
From archive.org
logos and pictures
Johnson
From archive.org
logos and pictures
Before founding MDV in 1983, Larry was a General Partner, Vice President of Hambrecht & Quist
Richard Frisbie, a founder of Battery
Robert Barrett, one of the founders of Battery
From archive.org
logos and pictures
In 1985, Timothy C. Draper left Alex. Brown & Sons to become the third generation of venture capitalists in his family with the formation of Draper Fisher Jurvetson. Tim restructured a family-owned Small Business Investment Company (SBIC) that had been set up by his father in 1979. Using SBA leverage, he created a highly successful early stage venture capital fund. Since then Draper Fisher Jurvetson has become synonomous with early stage (start-up) venture capital. Among other successes, Tim Draper was a founding investor in Parametric Technology, Digidesign, Parenting Magazine, Upside Publishing, and PLX Technology
From left to right: Dulenvie, Rachleff, Kagle, Harvey, Beirne and Val Vaden

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Service des relations industrielles (SRI) EPFL

Service des relations industrielles (SRI) EPFL

The Ancestors pre - 1958

1957 The Traitorous 8

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1957 Arthur Rock

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Service des relations industrielles (SRI) EPFL

The Ancestors investments

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Service des relations industrielles (SRI) EPFL

The First Generation Part 1 1958-1965

The First Generation

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The First Generation

1962 Draper and Johnson

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Some 1st gen. investments

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Draper&Johnson will invest in Tandem

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The First Generation Part 2 1965-1972

The First Generation

1965 Sutter Hill, AMC

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The First Generation

1969 Mayfield, Venrock

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The First generation

1970 Palo Alto Investments

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The First Generation

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The First Generation

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ARD alumnus Willian Burnes co-founds Charles River Venture in 1970.

Some 1st gen. investments

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The Giants 1972-1978

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Doug Leone (HP, Sun) 1988

The Reid Dennis Legacy

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The Reid Dennis Legacy

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Then Dennis launches Institutional Venture Partners (IVP) in 1976.

The Giants success stories

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Some investments of the Giants

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Hits and misses

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The Maturity 1978-1993

The new players

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Ed Glassmeyer cofounded in 1978 with Stewart Greenfield of Oak Investment Partners.

The new players