A history of venture capital

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A summary of chapter 4 of the book, Start-Up what we may still learn from Silicon Valley, published in 2007. More on www.startup-book.com

A summary of chapter 4 of the book, Start-Up what we may still learn from Silicon Valley, published in 2007. More on www.startup-book.com

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  • 1. © Service des relations industrielles (SRI) © EPFL A History ofVenture Capital Hervé Lebret January 4, 2007
  • 2. © Service des relations industrielles (SRI) © EPFLThe Ancestors pre - 1958
  • 3. 1957 – The Traitorous 8 © Service des relations industrielles (SRI) © EPFL 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 leftShockley Labs. to create a new company
  • 4. 1957 – Arthur Rock © Service des relations industrielles (SRI) © EPFL 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.
  • 5. And also … © Service des relations industrielles (SRI) © EPFL 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 1958Georges Doriot (a Harvardprofessor) founded American R&Din 1946 in Boston.
  • 6. The Ancestors’ investments © Service des relations industrielles (SRI) © EPFLFairchild Semiconductor was very successful andreached 12,000 employees but the founders werebought back their shares by Fairchild… they still becamewealthy.ARD financed High Voltage (a $1.8M return for a $200kinvestment) and Digital Equipment in 1957 (a $70k inv.worth $355M after 14 years).ARD stopped in 1972.DGA seems to have been less successful thoughand closed in 1969 when Rockefeller withdrew.
  • 7. © Service des relations industrielles (SRI) © EPFLThe First Generation Part 1 1958-1965
  • 8. The First Generation © Service des relations industrielles (SRI) © EPFL 1961 - Davis & Rock Davis joined Rock. They raised $3M with Moore, Noyce, Kleiner among othersTommy Davis, a Harvard-educatedlawyer and then vice president of KernCounty Land Company. Davis wantedto leave the Land Company because ithad little interest in high-technology Both Rock and Davis are Harvardinvestments though Davis had already Alumni, and Rock was a student ofmade a successful investment in the Doriothigh-technology firm, Watkins-Johnson
  • 9. The First Generation © Service des relations industrielles (SRI) © EPFL 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
  • 10. And also… © Service des relations industrielles (SRI) © EPFL 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 Firemans Fund Insurance finance committee didnt 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
  • 11. Some 1st gen. investments © Service des relations industrielles (SRI) © EPFL 1961-1965Rock & Davis $3M fund returned $100M. Itinvested in Scientific Data Systems (SDS), a Draper&Johnson will invest incompany Xerox bought to compete against TandemIBM, in Teledyne (ex-Amelco) and later inIntel when Moore and Gordon left Fairchild. Firemans Fund Insurance invested $1 million in an optical-character recognition company, Recognition Technology. “At the One member of “the Group”, height of the market, that investment was Dennis, investment was $10- worth over $40 million, which, in the 1960s 20k? in Ampex which will be was an outstanding performance. By the worth $1M in the end. time it was all over, Firemans 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.
  • 12. © Service des relations industrielles (SRI) © EPFLThe First Generation Part 2 1965-1972
  • 13. The First Generation © Service des relations industrielles (SRI) © EPFL 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.
  • 14. The First Generation © Service des relations industrielles (SRI) © EPFL 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)
  • 15. The First generation © Service des relations industrielles (SRI) © EPFL 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,…
  • 16. The First Generation © Service des relations industrielles (SRI) © EPFL 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.
  • 17. The First Generation © Service des relations industrielles (SRI) © EPFL 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.
  • 18. Some 1st gen. investments © Service des relations industrielles (SRI) © EPFL 1965-1972
  • 19. © Service des relations industrielles (SRI) © EPFLThe Giants1972-1978
  • 20. Kleiner Perkins © Service des relations industrielles (SRI) © EPFL 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
  • 21. Sequoia © Service des relations industrielles (SRI) © EPFL 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, well put up all the money, you put up all the blood, sweat and tears and well split the company", this with the founders. Then if we have to hire more people, well 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, well give you, for all the money, 5 percent, 10 percent of the deal." And, you know, that its a supply and demand thing. Its gone back the other way now. But, in starting with a team, its a typical thing to say, well, somewhere 40 to 60 percent, to divide it now. If theyve got the best thing since sliced bread and you think they have it and they think they have it, you know, then youll probably lose the deal because one of these guys will grab it.” Transcript of oral panel – the Pioneers of Venture Capital – September 2002
  • 22. Kleiner Perkins © Service des relations industrielles (SRI) © EPFL 30 years of activityPerkins and Kleinerwill be joined byCaufield and Byers(from AMC)in 1977and the partnershipbecomes KPCB.Later comefamous iconsJohn Doerr (Intel)andVinod Khosla(Sun founder)
  • 23. Sequoia © Service des relations industrielles (SRI) © EPFL 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
  • 24. The Reid Dennis Legacy © Service des relations industrielles (SRI) © EPFL 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.
  • 25. The Reid Dennis Legacy © Service des relations industrielles (SRI) © EPFL 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)
  • 26. The Giants success stories © Service des relations industrielles (SRI) © EPFL 1972 and after
  • 27. Some investments of the Giants © Service des relations industrielles (SRI) © EPFL 1974 and after
  • 28. Hits and misses © Service des relations industrielles (SRI) © EPFL from a couple of interviewsVenture Capitalist First Big Hits First Big MissArthur Rock SDS, Teledyne Bool and Babbage, CompaqPitch Johnson Bool and Babbage, then TandemBill Draper Qume AppleBurton McMurtry Roam TandemDennis Reid Recognition TechnologyDon Valentine Atari but also Apple, Cisco SunTom Perkins Tandem Apple
  • 29. © Service des relations industrielles (SRI) © EPFLThe Maturity1978-1993
  • 30. The new players © Service des relations industrielles (SRI) © EPFL 1976 1978 FoundersDuBose Montgomery was a Dick Kramlich (Arthurfounder of Menlo Ventures in Rock & Associates )1976. Carlisle joined in 1982 Frank Bonsal (Alexand Jarve in 1985 Brown) Chuck Newall (T. Rowe Price) Ed Glassmeyer co- founded in 1978 with Stewart Greenfield of Oak Investment Partners.
  • 31. The new players © Service des relations industrielles (SRI) © EPFL 1981 1981 Bill Bowes is the founder and prior to founding USVP, Bill was the founding shareholder (and its first employee) of Sevin Rosen was founded in 1981 by Amgen 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).
  • 32. The new players © Service des relations industrielles (SRI) © EPFL 1983 1983 In 1979, Adler & Company of New York established an Bill Davidow, SVP office in Silicon Valley. In Sales & Marketing at 1983, two Adler partners, Intel launches MDV James Swartz and Arthur Patterson, spun-off to create the bi-coastal firm, Accel Partners, having offices in New York and Silicon Valley. 1984 Gregory Avis Roe Stamps Stephen Woodsum
  • 33. The new players © Service des relations industrielles (SRI) © EPFL David Morgenthaler 1984 founded the firm in 1968. Morgenthaler began Rick Frisbie, founder of raising institutional funds Battery Ventures 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)
  • 34. Some investments © Service des relations industrielles (SRI) © EPFL 1978 and after
  • 35. © Service des relations industrielles (SRI) © EPFL The New KidsAround the Block 1993-2005
  • 36. Benchmark Capital © Service des relations industrielles (SRI) © EPFL 1995 Bruce Dunlevie Andy Rachleff Bob Kagle Kevin Harvey David BierneIn 1995 Bruce Dunlevie and Andy Rachleff, two veterans of the industry (from MPAE, MerillPickard, Anderson & Eyre), decided to create their own company, Benchmark. Their goalwas to have a firm with a "fundamentally different architecture," with no one person at thetop. The men had connections, money and their own brain power and they immediately setto work.They added two more partners to their ranks in very short order, Bob Kagle from theventure capital world and Kevin Harvey from the technology sector, and then brought inDavid Bierne, who had built a highly successful executive search business centeredaround technology.
  • 37. August, Foundation © Service des relations industrielles (SRI) © EPFLLightspeed, Redpoint Jim Anderson (the A in MPAE), Kathryn Gould Marquardt (TVI) & John (Oracle), Johnston (TVI, H&Q) Bill Elmore (Inman) launch August in 1995. launch Foundation in 1995.Redpoint was founded in 1999 by top The VC arm of Weiss, Peck & Greerpartners each from Brentwood Venture Venture Partners (1971) spun-off inCapital and IVP October 2000
  • 38. Some investments © Service des relations industrielles (SRI) © EPFL 1995 and after
  • 39. © Service des relations industrielles (SRI) © EPFLSome historical and economical perspective 1959-2005
  • 40. Some key drivers © Service des relations industrielles (SRI) © EPFL What is the real impact?1957: some great IPOs: HP, Varian1958: The SBIC (Small Business Investment Corporation) act provides federal fundmatching and will enable the dramatic increase of venture capital. The differentstructures 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 forpension fund managers who lose money with high-risk investments nearly stops inv. inventure capital1979: A new ERISA act which decreases fiduciary responsibility together with a goodIPO market in 1980 (Apple, Genentech) creates a new inflow of money1983: Too much money for two many companies: the Disk Drive companies crash.Venture Capital matures in the 80s. The semiconductor industry competes with Japanand lay-offs. The crisis will end with…1993: the beginning of the Internet
  • 41. A genealogy © Service des relations industrielles (SRI) © EPFL ARD Arthur Rock DGA The Group 1960 & Fireman Don Lucas Greylock Fairchild Draper & CRV Davis & Bryan& Johnson Edwards TA Assoc. Rock National Sutter Hill Mayfield Intel AMC BankAmerica (Westven) Venrock HP PAI 1970 Menlo Oak KPCB Sequoia IVA USVP NEA 1980 Sevin Rosen Brentwood IVP TVI MDV Matrix Accel DFJ Summit MPAE Battery Morgenthaler 1990 August Benchmark Foundation Lightspeed Redpoint
  • 42. The SBIC Ups & Downs © Service des relations industrielles (SRI) © EPFL 1959-1993Source: Creating Modern Venture Capital: Institutional Design and Performance in theEarly Years by Caroline Fohlin
  • 43. The maturity © Service des relations industrielles (SRI) © EPFL The 1980’sThe late 80s brought maturity, butwas also a big crisis fortechnologies. The semiconductorcompanies cut their work forceand the technology & VC sectorssuffered 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 7 35 6 30 5 25 $ Billions 4 20 3 15 10 2 5 1 0 0 1973 1975 1977 1979 1981 1983 1985 1987 1989 -5 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 Year year Source: The Rise and Fall of Venture Capital, Gompers
  • 44. The Impact of Venture Capital © Service des relations industrielles (SRI) © EPFL 1993 Source: The Rise and Fall of Venture Capital, Gompers
  • 45. The Internet bubble © Service des relations industrielles (SRI) © EPFL The 90s enthusiasm and 00s crisis Me dia n m ult iple s ( x ) 2 .8 2 .3 2 .2 2 .1 2 1 .9 1 .8 1 .7 1 .7 1 .6 1 .6 1 .6 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 1987 1989 1991 1993 1995 1997 1999 -1 0 -2 0 -3 0 Year 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
  • 46. The Nasdaq and the VCs © Service des relations industrielles (SRI) © EPFL 1971-20064500 904000 803500 70 1974: the oil crisis and ERISA act3000 602500 50 1984: the HDD crisis2000 401500 30 1990: US recession and1000 20 declining IRRs 500 10 0 0 2001: the Internet crash 1971 1976 1981 1986 1991 1996 2001Natural scale Nasdaq ( end y ear) VC f unds ( $B) 10000 100 1000 10 100 1 10 0. 1 1 0. 01 1971 1976 1981 1986 1991 1996 2001Source: Compilation HL Log scale Nasdaq ( end y ear) VC f unds ( $B)
  • 47. A chronology of funds (1/2) © Service des relations industrielles (SRI) © EPFL Fund number and year of creationSource: Compilation HL
  • 48. A chronology of funds (2/2) © Service des relations industrielles (SRI) © EPFL Size of funds (in $M)Notes1: fund 2000 back to $471M2: fund 2001 back to $830M3: fund 2001 back to $450M4: fund II (1981) $45M, III (1984) $126M5: fund 2000 back to $600M6: fund 2000 down to $650M, then $450MSource: Compilation HL
  • 49. A subjective “Top VC” list © Service des relations industrielles (SRI) © EPFL TOP US VCs Mohr Davidow Redpoint 16000 DFJ Benchmark 14000 USVP Crosspoint Brentwood 12000 Accel Sevin Rosen 10000 Oak Sierra $M 8000 NEA Matrix CRV 6000 Austin Sequoia 4000 Onset Interwest Menlo 2000 IVP Battery 0 Mayfield 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 KPCB Year
  • 50. And the returns? © Service des relations industrielles (SRI) © EPFL Exceptional IRRs Source: Compilation HLAlthough the data are not so easy to obtain (the numbers below are not fullyconsistent…), the VC world has generated exceptional returns. The individualsuccess stories are known. Some previous slides give some more numbers. Thereader can compare to the typical Wall Street numbers… Source: Compilation HL
  • 51. © Service des relations industrielles (SRI) © EPFL Israel1992-2005
  • 52. The Israel VC size © Service des relations industrielles (SRI) © EPFL
  • 53. The largest Israel VC funds © Service des relations industrielles (SRI) © EPFL
  • 54. Israel success stories © Service des relations industrielles (SRI) © EPFL
  • 55. © Service des relations industrielles (SRI) © EPFLand Europe?1972-2006
  • 56. A list of European funds © Service des relations industrielles (SRI) © EPFL Source: Compilation HL
  • 57. Timescale © Service des relations industrielles (SRI) © EPFL 1996-2005 Source: Compilation HL
  • 58. Timescale © Service des relations industrielles (SRI) © EPFL 1996-2005 Source: Compilation HL 8000 Wellington Viventures Ventech TVM 7000 Sof innova Siparex Quester Prelude Polytechnos Partech 6000 Partcom (Iris) Nordic VP Logispring Kennet Innovacom 5000 Index IDG Holland Gilde Galileo €M 4000 Eqvitec Ealy bird DVC DFJ eplanet Doughty Hanson Crescendo 3000 CDC Innovation Capricorn Capman Benchmark Banexi 2000 Auriga Atlas Apax GE Apax FR Apax UK 1000 Amadeus Alta Berkeley ACT Accel 3i - 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
  • 59. And a few people © Service des relations industrielles (SRI) © EPFL a relatively recent activityThe first attempt of Doriot in the UK, Technical Development Corporation, launched in1962, was sold at a loss to the ancestor of 3i. A second attempt in 1965, EuropeanEnterprises Development (EED), set up in Paris, was more successful despite anunsupportive environment. The financial uncertainties of mid-70s led it to stop itsactivities in 1976. Its example however had led a number of institutions to get interested inthe activity. From 1977, the EEC started to study action plans to finance enterprises, interalias high tech start-ups. 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. http://www.europeanvc.com/history.htm
  • 60. And a few people © Service des relations industrielles (SRI) © EPFL a relatively recent activity Sir David Cooksey was the Founder of Advent Venture Partners in 1981 and was Chief Executive from 1981 to 1987 and Bryan Wood Chairman from 1987 until his retirement in Founder 1982 2006. Michiel de Haan Founder 1980 1982 Vincent Worms and Thomas McKinley TVM launched in 1983 with €87M Founded in 1945 by British banks; the 3i group was created in 1987 A US company created in 1969 by when the banks sold their stakes to Alan Patricof which has a a public limited company. European presence since the 80s http://www.europeanvc.com/history.htm
  • 61. And a few people © Service des relations industrielles (SRI) © EPFL a relatively recent activity 1997 2000 1998 2001
  • 62. Some European deals © Service des relations industrielles (SRI) © EPFL
  • 63. © Service des relations industrielles (SRI) © EPFLSome historical perspective archive.org 1996-2000
  • 64. From archive.org © Service des relations industrielles (SRI) © EPFL logos and picturesJohnson
  • 65. From archive.org © Service des relations industrielles (SRI) © EPFL logos and pictures Before founding MDV in 1983, Larry was a General Partner, Vice President of Hambrecht & Quist Richard Frisbie, a founder Robert Barrett, one of of Battery the founders of Battery
  • 66. From archive.org © Service des relations industrielles (SRI) © EPFL 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