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Service des relations industrielles (SRI) EPFL

A History of Venture Capital


Herv Lebret January 4, 2007

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The Ancestors pre - 1958

1957 The Traitorous 8

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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 left Shockley Labs. to create a new company

1957 Arthur Rock

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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
ARD DGA

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William Draper II (VP Dillon Read), Rowan Gaither (founder of Rand) and Frederick Anderson (retired general) launch DGA with Rockfeller Group money in 1958 Georges Doriot (a Harvard professor) founded American R&D in 1946 in Boston.

The Ancestors investments

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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.

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The First Generation Part 1 1958-1965

The First Generation


1961 - Davis & Rock
Davis joined Rock. They raised $3M with Moore, Noyce, Kleiner among others

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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

The First Generation

1962 Draper and Johnson

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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

And also
Reid Dennis, Don Lucas

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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

Some 1st gen. investments


1961-1965
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.

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Draper&Johnson will invest in Tandem

One member of the Group, Dennis, investment was $1020k? in Ampex which will be worth $1M in the end.

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.

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.

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The First Generation Part 2 1965-1972

The First Generation

1965 Sutter Hill, AMC


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

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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.

The First Generation

1969 Mayfield, Venrock

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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)

The First generation

1970 Palo Alto Investments

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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,

The First Generation


1965-70 - Boston
Willian Elfers leaves ARD as Doriot does not let control and creates Greylock with Daniel Gregory and Charles Waite.
W. Elfers

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

The First Generation


1965-70 - Boston

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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.

Some 1st gen. investments


1965-1972

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The Giants 1972-1978

Kleiner Perkins
1972
Thomas Perkins

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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

Sequoia
1972

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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, 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
30 years of activity
Perkins and Kleiner will be joined by Caufield and Byers (from AMC)in 1977 and the partnership becomes KPCB.

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Later come famous icons John Doerr (Intel) and Vinod Khosla (Sun founder)

Sequoia
30 years of activity
Joining Valentine, the firm will grow with famous to-become partners.
Pierre Lamond (National) - 1981 Mike Moritz (Time Magazine) 1986

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Doug Leone (HP, Sun) 1988

The Reid Dennis Legacy


1974

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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.

The Reid Dennis Legacy


1976

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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

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Some investments of the Giants


1974 and after

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Hits and misses


from a couple of interviews
Venture Capitalist Arthur Rock Pitch Johnson Bill Draper Burton McMurtry Dennis Reid Don Valentine Tom Perkins First Big Hits SDS, Teledyne Bool and Babbage, then Tandem Qume Roam Recognition Technology Atari but also Apple, Cisco Tandem

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First Big Miss Bool and Babbage, Compaq Apple Tandem Sun Apple

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The Maturity 1978-1993

The new players


1976
DuBose Montgomery was a founder of Menlo Ventures in 1976. Carlisle joined in 1982 and Jarve in 1985

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1978
Founders Dick Kramlich (Arthur Rock & Associates ) Frank Bonsal (Alex Brown) Chuck Newall (T. Rowe Price)

Ed Glassmeyer cofounded 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

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1981

Sevin Rosen was founded in 1981 by 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).

The new players


1983
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.

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1983
Bill Davidow, SVP Sales & Marketing at Intel launches MDV

1984

Gregory Avis

Roe Stamps

Stephen Woodsum

The new players


1984
Rick Frisbie, founder of Battery Ventures

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David Morgenthaler founded the firm in 1968. Morgenthaler began raising institutional funds 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)

Some investments
1978 and after

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Service des relations industrielles (SRI) EPFL

The New Kids Around the Block

1993-2005

Benchmark Capital
1995
Bruce Dunlevie Andy Rachleff

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Bob Kagle

Kevin Harvey

David Bierne

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.

August, Foundation

Lightspeed, Redpoint
Marquardt (TVI) & John Johnston (TVI, H&Q) launch August in 1995.

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Jim Anderson (the A in MPAE), Kathryn Gould (Oracle), Bill Elmore (Inman) launch Foundation in 1995.

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

Some investments
1995 and after

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Service des relations industrielles (SRI) EPFL

Some historical and economical perspective

1959-2005

Some key drivers


What is the real impact?
1957: some great IPOs: HP, Varian

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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

A genealogy
1960

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ARD

Arthur Rock
Fairchild

DGA

The Group & Fireman Don Lucas

Greylock CRV TA Assoc. Mayfield


Intel

Draper & Davis & Rock


National

Johnson Sutter Hill AMC


HP

Bryan& Edwards

Venrock
1970

BankAmerica (Westven)

PAI

Menlo USVP
1980

Oak NEA
Sevin Rosen

KPCB

Sequoia

IVA IVP DFJ TVI

Brentwood MDV

Accel Summit Battery


Morgenthaler
1990

Matrix MPAE

August Lightspeed Redpoint

Benchmark Foundation

The SBIC Ups & Downs


1959-1993

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

Early Years by Caroline Fohlin

The maturity

The 1980s

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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.

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


35 30
$ Billions

7 6 5 4 3 2 1 0 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 Year

25 20 15 10 5 0 1973 -5

1975

1977

1979

1981

1983

1985

1987

1989

year

Source: The Rise and Fall of Venture Capital, Gompers

The Impact of Venture Capital


1993

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Source: The Rise and Fall of Venture Capital, Gompers

The Internet bubble


2 .3 2 .1 1 .8 1 .6 1 .9 1 .7 1 .7 1 .6 1 .6 2

The 90s enthusiasm and 00s crisis


Me dia n m ult iple s ( 'x ')
2 .8 2 .2

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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 -1 0 -2 0 -3 0 Year 1987 1989 1991 1993 1995 1997 1999

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

The Nasdaq and the VCs


1971-2006
4'500 4'000 3'500 3'000 2'500 2'000 1'500 1'000 500 0 1971 1976 1981 1986 1991 1996 2001 90 80 70 60 50 40 30 20 10 0

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1974: the oil crisis and ERISA act 1984: the HDD crisis 1990: US recession and declining IRRs 2001: the Internet crash
100

Natural scale

Nasdaq ( end y ear)

VC f unds ( $B)

10'000

1'000

10

100

10

0. 1

1 1971 1976 1981 1986 1991 1996 2001

0. 01

Source: Compilation HL

Log scale

Nasdaq ( end y ear)

VC f unds ( $B)

A chronology of funds (1/2)

Fund number and year of creation

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Source: Compilation HL

A chronology of funds (2/2)


Size of funds (in $M)

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Notes 1: fund 2000 back to $471M 2: fund 2001 back to $830M 3: fund 2001 back to $450M 4: fund II (1981) $45M, III (1984) $126M 5: fund 2000 back to $600M 6: fund 2000 down to $650M, then $450M

Source: Compilation HL

A subjective Top VC list


TOP US VCs

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Mohr Davidow

16'000 14'000 12'000 10'000

Redpoint DFJ Benchmark USVP Crosspoint Brentwood Accel Sevin Rosen Oak Sierra NEA Matrix CRV Austin Sequoia Onset Interwest Menlo IVP Battery Mayfield

$M

8'000 6'000 4'000 2'000 0

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

KPCB

Year

And the returns?


Exceptional IRRs

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Source: Compilation HL

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

Source: Compilation HL

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Israel 1992-2005

The Israel VC size

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The largest Israel VC funds

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Israel success stories

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and Europe? 1972-2006

A list of European funds

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Source: Compilation HL

Timescale
1996-2005

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Source: Compilation HL

Timescale
1996-2005
8'000 7'000

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Source: Compilation HL
Wellington Viventures Ventech TVM Sof innova Siparex Quester Prelude Polytechnos

6'000

Partech Partcom (Iris) Nordic VP Logispring Kennet

5'000

Innovacom Index IDG Holland Gilde

Galileo

4'000

Eqvitec Ealy bird DVC DFJ eplanet Doughty Hanson

3'000

Crescendo CDC Innovation Capricorn Capman Benchmark

2'000

Banexi Auriga Atlas Apax GE Apax FR Apax UK

1'000

Amadeus Alta Berkeley ACT Accel 3i

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

And a few people


a relatively recent activity

Service des relations industrielles (SRI) EPFL

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.

Founded in 1972 by Christian Marbach and Antoine Dupont Fauville with strong links in the USA: Peter Brooke and Jean Delage (TA Associates) will be critical. 22MFF helped by a law on Venture Capital.

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

And a few people


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 Chairman from 1987 until his retirement in 2006.

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Bryan Wood Founder 1982

Michiel de Haan Founder 1980

1982
Vincent Worms and Thomas McKinley

TVM launched in 1983 with 87M A US company created in 1969 by Alan Patricof which has a European presence since the 80s

Founded in 1945 by British banks; the 3i group was created in 1987 when the banks sold their stakes to a public limited company.

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

And a few people


a relatively recent activity
1997

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2000

1998

2001

Some European deals

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Service des relations industrielles (SRI) EPFL

Some historical perspective archive.org

1996-2000

From archive.org
logos and pictures

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Johnson

From archive.org
logos and pictures

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Before founding MDV in 1983, Larry was a General Partner, Vice President of Hambrecht & Quist

Richard Frisbie, a founder of Battery

Robert Barrett, one of the founders of Battery

From archive.org
logos and pictures

Service des relations industrielles (SRI) EPFL

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