Book Excerpt April 3, 2008, 5:00PM EST

Creative Capital

When Georges Doriot shepherded Digital Equipment's IPO in 1966, he changed the rules of entrepreneurship and laid the groundwork for tech giants like Apple and Google

By Spencer E. Ante

Browse Issues

Browse the BusinessWeek Archive

Doriot's vision and charm were instrumental in winning over investors Ivan Massar

Story Tools

Editor's note: This is an extended version of a story published in the Apr. 14, 2008, issue of BusinessWeek magazine.

Creative Capital: Georges Doriot and the Birth of Venture Capital is BusinessWeek editor Spencer E. Ante's chronicle of the life of Georges Doriot, a visionary French immigrant who pioneered the venture capital industry from Boston, sparking the transformation of America into a high-tech startup nation. A 20th century Renaissance man, Doriot revolutionized the military as a U.S. brigadier general during World War II by applying science to research and development; in 1959 he founded the first European business school, the Institut Européen d'Administration des Affaires (INSEAD); and he was arguably the most influential professor at Harvard Business School during the postwar period. In this excerpt, Doriot and American Research & Development (ARD), the landmark venture capital firm that he joined in 1946 as president, orchestrate the initial public offering of Digital Equipment Corp. It was the venture industry's first blockbuster offering, creating the paradigm of entrepreneurial success for venture-backed companies such as Intel (INTC), Apple (AAPL), and Google (GOOG). In the words of F. Warren Hellman, a former president of Lehman Brothers (LEH), which took many ARD startups public, including Digital: "Doriot was at the forefront of fundamentally changing our economy."

The annual meetings of American Research & Development were always festive affairs. Over the last 20 years, Doriot had transformed a normally sedate event into a three-ring circus where entrepreneurs could network, trade ideas, and show off their wares to hundreds of stockholders, friends, and fawning members of the press.

But ARD's gathering in the spring of 1966 was an unusually raucous occasion. Pressure had been growing on Doriot to address its problems with the U.S. Securities & Exchange Commission (SEC), and to take public its rising star, Digital Equipment Corp., a Massachusetts startup that had spearheaded the market for minicomputers. The SEC had begun to question a number of ARD's practices, including its issuance of stock options to company officers and the seemingly rich valuations that ARD placed on the small private companies it financed.

On the meeting's first day, Doriot took on the SEC, highlighting the rigorous process by which ARD sought to value these young companies. To determine the worth of a startup, ARD evaluated many factors, including the company's product evolution, financial results, management, problems, plans for the future, and its willingness to accept advice. "Our valuations when securities are not traded are worked out very carefully, with great desire to give stockholders an idea of trends, but also with an obligation not to give false hopes," said Doriot.

It was a convincing argument, but one investor did not buy it. Otto Hirschman, who owned 14,600 shares of ARD stock, stood up and criticized the company's management—the first time it had been publicly faulted in its 20-year history. Hirschman argued that ARD treated its stockholders unfairly by undervaluing the company and not paying out enough in dividends. "A new board of directors should be elected to better represent the interests of all stockholders," declared Hirschman. "The stock is worth $150 a share if we had another board."

Behind the Scenes

Had Doriot confided in Hirschman his future plans, the activist investor probably would never have attacked the ARD board. For Doriot was laying the groundwork for a stock offering that would delight Hirschman and other shareholders like no other IPO had ever done before—the IPO of Digital Equipment.