A History of Venture Capital - Lebret

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A History

of

Venture Capital

Hervé Lebret

January 4, 2007


The Ancestors

pre - 1958


1957 – The Traitorous 8

Shockley was so difficult with his colleagues that 8 left Shockley Labs. to create a new company

The eight men were Julius

Blank, Victor Grinich, Jean

Hoerni, Eugene Kleiner, Jay

Last, Gordon Moore, Robert

Noyce and Sheldon Roberts.


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 …

Georges Doriot (a Harvard professor) founded American R&D in 1946 in Boston.

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


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



Davis joined Rock. They raised $3M with Moore, Noyce, Kleiner among others

1961 - Davis & Rock

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



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

1962 – Draper and Johnson


And also…

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

Reid Dennis, Don Lucas


Some 1st gen. investments

1961-1965

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.”

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.

One member of “the Group”,

Dennis, investment was $10-

20k? in Ampex which will be

worth $1M in the end.

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.

Draper&Johnson will invest in

Tandem



Part 2

1965-1972



Johnson and Draper go on their own: Johnson launches AMC - the Asset Management Company (still active)

1965 – Sutter Hill, AMC

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.



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)

1969 – Mayfield, Venrock

http://www.mayfield.com/index.php/index.html?sid=


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,…


Willian Elfers leaves ARD as Doriot does not let control and creates Greylock with Daniel Gregory and Charles Waite.

1965-70 - Boston The First Generation

(From left to right) Howard E. Cox, Jr., Charles P. Waite, Henry F. McCance, Daniel S.

Gregory, William Elfers.

C.Waite

W. Elfers


1965-70 - Boston The First Generation

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

ARD alumnus Peter Brooke (then at FNB Boston) launches TA Associates in 1968 as a division of Tucker Anthony, a regional investment bank.

http://www.ta.com/index.asp


Some 1st gen. investments

1965-1972


The Giants

1972-1978


Kleiner Perkins

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

1972 Thomas Perkins Eugene Kleiner


Sequoia

Don Valentine, a co-founder of National and Fairchild marketing director creates in 1972 the VC arm of the Capital Group, later named Sequoia.

1972

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

Perkins and Kleiner will be joined by Caufield and Byers (from AMC)in 1977 and the partnership

becomes KPCB.

30 years of activity

Later come

famous icons

John Doerr (Intel)

and

Vinod Khosla

(Sun founder)

http://www.kpcb.com/index.html


Sequoia

Joining Valentine, the firm will grow with famous to-become partners.

30 years of activity

Pierre Lamond (National) - 1981

Mike Moritz (Time Magazine) – 1986

Doug Leone (HP, Sun) – 1988

http://www.pbs.org/opb/nerds2.0.1/cast/page6.html

http://www.sequoiacap.com/


The Reid Dennis Legacy

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.

1974


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 First Big Hits First Big Miss

Arthur Rock SDS, Teledyne Bool and Babbage, Compaq

Pitch Johnson Bool and Babbage, then Tandem

Bill Draper Qume Apple

Burton McMurtry Roam Tandem

Dennis Reid Recognition Technology

Don Valentine Atari but also Apple, Cisco Sun

Tom Perkins Tandem Apple


The Maturity

1978-1993


The new players

1978

Founders

Dick Kramlich (Arthur

Rock & Associates )

Frank Bonsal (Alex

Brown)

Chuck Newall (T.

Rowe Price)

1976

DuBose Montgomery was a

founder of Menlo Ventures in

1976. Carlisle joined in 1982

and Jarve in 1985

Ed Glassmeyer co-

founded 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

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).

Sevin Rosen was founded in 1981 by

L.J. Sevin (Mostek) and Ben Rosen (TI)

1981

http://www.matrixpartners.com/index.asp

http://www.eng.lsu.edu/alumni/hod/sevin.jpg


The new players

1983

Bill Davidow, SVP

Sales & Marketing at

Intel launches MDV

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

1984

Gregory Avis Roe Stamps Stephen Woodsum

http://www.summitpartners.com/default.aspx


The new players

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)

1985

David Morgenthaler

founded the firm in 1968.

Morgenthaler began

raising institutional funds

in the 1980s

1984

Rick Frisbie, founder of

Battery Ventures

http://www.morgenthaler.com/default.asp


Some investments 1978 and after


The New Kids

Around the Block

1993-2005


Benchmark Capital

1995

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.

Bruce Dunlevie Andy Rachleff

Bob Kagle Kevin Harvey

David Bierne

http://www.benchmark.com/index.php


August, Foundation

Lightspeed, Redpoint

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

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.

http://www.lightspeedvp.com/default.asp


Some investments 1995 and after


Some historical and economical

perspective

1959-2005


Some key drivers

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

What is the real impact?


ARD DGA The Group

& Fireman

Greylock

Don Lucas

Arthur Rock

CRV

TA Assoc.

Fairchild

KPCB

Intel

Johnson

Draper &

AMC

Sutter HillMayfield

VenrockPAIHP

National

Sequoia

Rock

IVA

IVP TVI

NEA

BankAmerica

(Westven)

MatrixMDV DFJ

BenchmarkAugust

Redpoint

Davis &

MenloOak

USVP

Accel

Summit

Morgenthaler

Battery

Bryan&

Edwards

MPAE

Foundation

Lightspeed

Sevin Rosen Brentwood

1960

1970

1980

1990

A genealogy


The SBIC Ups & Downs

Source: Creating Modern Venture Capital: Institutional Design and Performance in the

Early Years by Caroline Fohlin

1959-1993


Median re t urns of vent ure capit a l

-5

0

5

10

15

20

25

30

35

1973 1975 1977 1979 1981 1983 1985 1987 1989

year

The maturity The 1980’s

Source: The Rise and Fall of Venture Capital, Gompers

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.

0

1

2

3

4

5

6

7

$ B

illio

ns

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993

Year

Ne w C om m itm e nts to V e ntur e C a pita l Funds in C onsta nt 1 9 9 3


The Impact of Venture Capital

Source: The Rise and Fall of Venture Capital, Gompers

1993


Median I RR ( % )

-30

-20

-10

0

10

20

30

40

50

1985 1987 1989 1991 1993 1995 1997 1999

Year

The Internet bubble

Source: The Venture Capital Industry Report, Dow Jones

The recent numbers may not be accurate as they are too recent;

they however some negative effects of the Internet bubble.

The 90s enthusiasm and 00s crisis Median m ult iples ( 'x ')

1.8

1.61.7

1.9

1.71.6

2.3

2.1

1.6

2

2.2

2.8

1.4

1.1

0.60.7

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000


0

500

1'000

1'500

2'000

2'500

3'000

3'500

4'000

4'500

1971 1976 1981 1986 1991 1996 2001

0

10

20

30

40

50

60

70

80

90

Nasdaq (end year) VC funds ($B)

1

10

100

1'000

10'000

1971 1976 1981 1986 1991 1996 2001

0.01

0.1

1

10

100

Nasdaq (end year) VC funds ($B)

The Nasdaq and the VCs 1971-2006

Natural scale

Log scale

1974: the oil crisis and ERISA act

1990: US recession and

declining IRRs

1984: the HDD crisis

2001: the Internet crash

Source: Compilation HL


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



4: fund II (1981) $45M, III (1984) $126M


6: fund 2000 down to $650M, then $450M


TOP US VCs

0

2'000

4'000

6'000

8'000

10'000

12'000

14'000

16'0001

98

6

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Year

$M

Mohr Davidow

Redpoint

DFJ

Benchmark

USVP

Crosspoint

Brentwood

Accel

Sevin Rosen

Oak

Sierra

NEA

Matrix

CRV

Austin

Sequoia

Onset

Interwest

Menlo

IVP

Battery

Mayfield

KPCB

A subjective “Top VC” list


And the returns?

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…

Exceptional IRRs




Israel

1992-2005


The Israel VC size


The largest Israel VC funds


Israel success stories

http://www.pitango.com/default.asp

http://www.star-ventures.com/index.html

http://www.gizavc.com/index.htm

http://www.evergreen.co.il/index.asp

http://www.walden.co.il/index.asp

http://www.challenge.co.il/index.html


and Europe?

1972-2006


A list of European funds



Timescale

1996-2005 Source: Compilation HL


Timescale

1996-2005

-

1'000

2'000

3'000

4'000

5'000

6'000

7'000

8'000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€M

Wellington

Viventures

Ventech

TVM

Sofinnova

Siparex

Quester

Prelude

Polytechnos

Partech

Partcom (Iris)

Nordic VP

Logispring

Kennet

Innovacom

Index

IDG

Holland

Gilde

Galileo

Eqvitec

Ealy bird

DVC

DFJ eplanet

Doughty Hanson

Crescendo

CDC Innovation

Capricorn

Capman

Benchmark

Banexi

Auriga

Atlas

Apax GE

Apax FR

Apax UK

Amadeus

Alta Berkeley

ACT

Accel

3i



And a few people

a relatively recent activity

Founded in 1972 by Christian Marbach and Antoine Dupont Fauville

with strong links in the USA: Peter Brooke and Jean Deléage (TA

Associates) will be critical. 22MFF helped by a law on Venture Capital.

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.

http://www.europeanvc.com/history.htm

http://www.sofinnova.fr/



And a few people



TVM launched

in 1983 with €87M

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

Vincent Worms and Thomas McKinley

1982

Founded in 1945 by British banks;

the 3i group was created in 1987

when the banks sold their stakes to

a public limited company. A US company created in 1969 by

Alan Patricof which has a

European presence since the 80s


http://www.snellwilcox.com/company/investors/

http://www.tvmvc.com/

http://www.altaberkeley.com/index.html

http://www.atlasventure.com/

http://www.partechvc.com/

http://www.3i.com/index.html


1997

1998

2001

2000

And a few people


http://www.amadeuscapital.com/team/anne.html

http://www.amadeuscapital.com/team/hermann.html

http://www.indexventures.com/webapps/indexweb/htm/home.htm

http://www.accel.com/index.php

http://www.benchmark.com/index.php


Some European deals


Some historical perspective

archive.org

1996-2000


From archive.org

logos and pictures

Johnson

http://web.archive.org/web/19961108215553/http://www.kpcb.com/main.html

http://web.archive.org/web/19970327230606/http://www.sequoiacap.com/worldnetwork.html

http://web.archive.org/web/19961223162112/http://www.ta.com/ta.htm

http://web.archive.org/web/19961223162112/http://www.ta.com/ta.htm


From archive.org

logos and pictures

Before founding MDV in 1983, Larry

was a General Partner, Vice President

of Hambrecht & Quist

Robert Barrett, one of

the founders of Battery

Richard Frisbie, a founder

of Battery

http://web.archive.org/web/19970127040039/http://www.battery.com/partners.html

http://web.archive.org/web/19970127040039/http://www.battery.com/partners.html


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

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/dunlevie.html

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/rachleff.html

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/kagle.html

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/harvey.html

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/vaden.html

http://web.archive.org/web/19970523072303/http://www.benchmark.com/partners/beirne.html

Documents

A History of Venture Capital - Lebret