Georges Doriot or the inception of a Venture Capitalist

In January of 1942, Queen Isabella of Castile chose to fund Christopher Columbus’s voyage to the west of the Atlantic Ocean in an attempt to find a quicker way to the indies. At that time, the Spanish monarchy was not in a strong financial position so in order to finance Columbus’s voyage, the Queen used the Spanish Crown’s jewels. This venture, that changed Spain and the world forever, it’s an example of how a venture capitalist can disrupt the status quo. In 1946, Georges Doriot decided to expand the concept even further. He noticed that small companies with interesting ideas failed due to shortage of capital. Therefore, he founded the American Research and Development Corporation (ARDC), the first venture capital firm.

Georges Doriot was born in France but emigrated to the United States to get an MBA and stayed as a professor of Harvard Business School. He is also known for founding INSEAD, Europe’s best ranked graduate business school. With ARDC, Georges Doriot helped innovative ideas disrupt the market while completely changing the way the way the modern world sees investing and entrepreneurship.

Doriot modified the way the financial world evaluates loans and investments. He noted that banks and other Wall Street financers based their decisions looking on the client's past (credit score, etc) rather than the future. Georges Doriot thought that high tech investor need to focus more on the idea and less in the risk. Doriot’s theory was disregarded by Wall Street specialists who predicted that his company (ARDC) would be out of business in five years. Nevertheless, Doriot quickly proved them wrong. One of the best examples was the DEC (Digital Equipment Corporation) case. In 1957 Doriot’s company lent 70,000 $ to this small computer manufacturing startup owned by two MIT engineers. This loan gave ARDC 70% of ownership of DEC. Nine years later, the sale of ARDC’s ownership gave them a 500,000% return of investment.

In addition, Georges Doriot widened the source of capital from just wealthy individuals to the general public. Before Doriot, when an entrepreneur was seeking to finance his venture, he went to individuals like Rockefeller, Vanderbilt or Rothschild. Investing was seen as a risky activity that needed to be supported with great liquidity that could absorb the losses, if necessary. However, Doriot believed that investing must be a public activity in order to

help innovating startups. Most of the times, wealthy individuals are risk adverse due to the position they maintain. Moreover, the startups may conflict or disrupt one of their main businesses. For example, an oil magnate would surely not fund a solar panel startup because their success will clash with his interests. Furthermore, by allowing a lot of small investments big capitals could be raised more quickly.

Georges Doriot did not invent venture capital but changed it to serve as a catalyst for the technological revolution. He transformed the financial services by making investors focus on the idea rather than on the entrepreneur history. He transformed the way entrepreneurs seek for capital and showed the world that high risks could also mean high returns. In the end, ARDC was bought by a giant Wall Street conglomerate. However, venture capital firms like Bain Capital Ventures, Andreessen Horowitz or Khosla Ventures still use his principles to invest in small and innovative startups. In fact, Silicon Valley’s success is the tangible proof of how Georges Doriot ideas revolutionized the way investments are conceived.

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