A Harvard professor invested $70,000 in a computer startup that returned $355 million.
In June 1946, a group of New England elites incorporated American Research and Development Corporation in Boston. The founders included Karl Compton, president of MIT, Ralph Flanders, president of the Federal Reserve Bank of Boston, and Georges Doriot, a French-born Harvard Business School professor who had served as a brigadier general overseeing U.S. Army research during the war.1 Doriot became ARD's president. The firm was the first venture capital enterprise to raise funds from institutional investors rather than family wealth.2
Wealthy families had financed risky ventures for centuries. The Medicis backed explorers, and the Rothschilds funded early railroads. In 1946 alone, J.H. Whitney and Company and the Rockefeller Brothers Fund also launched as venture firms.3 Doriot's innovation was structural. He turned a rich family's hobby into an institutional product, raising capital from foundations, university endowments, and eventually pension funds.
Doriot's investment philosophy emphasized founders over ideas. "An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability," he wrote in ARD's 1949 annual report.4
ARD's defining success came in 1957, when it invested $70,000 in Digital Equipment Corporation, a startup founded by Kenneth Olsen and Harlan Anderson to build cheaper alternatives to IBM mainframes. By 1971, that stake was worth $355 million.5 Over its lifetime, ARD achieved annualized returns of 14.7 percent, more than half attributable to DEC alone.
The limited partnership structure that would come to define the industry emerged later. Draper, Gaither and Anderson organized the first venture capital limited partnership in Palo Alto in 1959.6 In 1978, there were 23 venture funds in the United States managing $500 million. By 1983, there were 230 firms overseeing $11 billion.7