Georges Doriot, a university professor born 124 years ago, is not a household name. His death from lung cancer in 1987 long preceded the rise of the Faangs, which stands for the tech stocks that have dominated our lives. The acronym refers to Meta Platforms (formerly Facebook), Amazon, Apple, Netflix and Alphabet (formerly Google).
Mark Zuckerberg was only three years old when Doriot died. He is unlikely to have been moved by Doriot’s demise. However, Zuckerberg owes his success to Doriot’s vision.
Doriot was the father of venture capital. Venture capital is the fuel that spawned the Faang giants. They were once start-ups struggling in a garage. Its early funding came from VCs like Kleiner Perkins and Sequoia.
Doriot was a French engineer who was born into a family of technicians. Like many ambitious Europeans of the 1920s, he saw America as the promised land. He was inspired by an American innovation — the MBA.
He took his MBA at Harvard in 1926. Some found his French accent hard to follow. But, his intellect was crystal clear. Young Doriot was invited to join the Harvard Business School faculty.
Doriot was placed in charge of military procurement during World War Two. He worked at the Pentagon. His military moustache gave him the bearing of a general. The war had such a deep impact that even academics had to play a part.
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Doriot’s skills at identifying winning technologies soon became apparent. Also, the armour that the infantrymen used was often twice their weight. It was impossible for soldiers to be nimble.
Doriot lightened the load of the soldiers. He introduced innovations such as lightweight armour made of plastic.
The Harvard academic had a close eye on the technology pulse. The Massachusetts Institute of Technology president and other notables from Boston, encouraged him to start an investment company. In 1946, American Research and Development (ARD) was founded.
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ARD is the ancestor of the VCs that power today’s tech industry. In the 1940s, innovators had a tough time. Big companies and banks were the only sources of funding.
ARD was one of the few sources of finance. Doriot organised weekly lunch meetings with technology entrepreneurs. This was long before the Zoom era. In 1957, Doriot had a particularly impressive lunch meeting. It was not because of the steak or the wine. He met two MIT professors who had founded Digital Equipment Corporation (DEC). DEC wanted to use transistors in the computer industry. At the time, computers used vacuum tubes. They were so bulky that they were half the size of an average HDB flat.
Doriot invested US$70,000 for a 70% equity stake in DEC. He also put in US$30,000 in debt. DEC was a pathbreaker. It led to computers becoming the size of today’s iPhones. It proved to be a multi-bagger. In 15 years, the investment was valued at US$372 million, US$2.3 billion in today’s terms. It rose 5428-fold.
Doriot pioneered many of the common features of the VC world. VC investors provide insight and guidance to their investees. Doriot served as a mentor to DEC.
Investments like DEC encouraged others to enter the VC field. It is a US$240 billion ($317 billion) industry today.
The VC industry had a tough time last year, though. The 2022 tech collapse has made investors wary. The word “unicorn” describes an unlisted company with over US$1 billion valuation. Unicorn funding reached a six-year low in 1Q2023, according to CB Insights. Overall funding is at its lowest point since 4Q2019.
The VC malaise has encouraged the rise of venture debt. It is not entirely new and is not exactly a rival. Venture debt providers lend to start-ups. The debt does not require collateral. It is a risky investment, as many startups have weak cashflow outlooks. But, it is a vital aspect of venture funding. It was around 1957 when DEC received US$30,000 of venture debt from Doriot’s company.
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The entire asset class is only a tenth of the size of the VC industry. India and Southeast Asia seem fertile markets for venture debt. According to Lighthouse Canton, the total market for venture debt is about US$7 billion per annum. There are capital-hungry start-ups looking to become the next Grab Holdings or Byju’s, according to Rajesh Raju of Kalaari Capital.
Venture debt may blossom as equity funding has dried up. Investors can invest in funds such as LC Venture Debt Fund and solutions provided by Rhodium Capital. Doriot had a legacy well beyond his time and place.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
